---

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

# FORM 20-F

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

OR

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

For the fiscal year ended December 31, 2008

OR

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

For the transition period from ____ to _____

OR

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

Date
of event requiring this shell company report: Not applicable

# Commission File No.
000-50867

SYNERON MEDICAL LTD.(Exact name of Registrant as specified in its charter)

N/A(Translation of Registrants name into English)

ISRAEL(Jurisdiction of incorporation or organization)

Industrial Zone,
Yokneam Illit, 20692, Tavor Building P.O.B. 550, Israel(Address of principal executive offices)

Fabian Tenenbaum, CFO
Telephone: 972-732-442200
Email: CFO@syneron.comFacsimile: 972-732-442202
Industrial Zone, Yokneam Illit, 20692, Tavor Building P.O.B. 550, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

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



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

None

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

None

Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock as of the close of
the period covered by the annual report.

As of December 31, 2008, the Registrant had 27,472,775 Ordinary Shares outstanding (excluding
treasury shares).

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

o Yes     x No

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

o Yes     x No

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

x Yes     o No

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

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

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

U.S. GAAP x     International Financing Reporting Standards as issued by the International Accounting Standards Board o     Other o

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

Item 17 o Item 18 o

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

o Yes     x No



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In
this Annual Report on Form 20-F, unless the context suggests otherwise, the terms
Syneron, the Company, we, us,
our or ours refer to Syneron Medical Ltd. and its consolidated
subsidiaries. All references in this Annual Report on Form 20-F to U.S.
dollars, dollars or $ are to the legal currency of the
United States of America, and all references in this Annual Report on Form 20-F to
NIS or New Israeli Shekel are to the legal currency of Israel.

This
Annual Report on Form 20-F contains forward-looking statements within the meaning of
Section 27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the
Securities Exchange Act of 1934, as amended, relating to future events or our future
performance. The use of the words projects, may,
plans, or intends, or words of similar import, identifies a
statement as forward looking. The forward-looking statements included herein
are based on current expectations that involve a number of known and unknown risks and
uncertainties. These forward-looking statements are based on certain assumptions,
including, but not limited to, the following: the assumption that we will not lose a
significant customer or customers or experience increased fluctuations of demand or
rescheduling of purchase orders; that our products will be approved by appropriate
regulatory authorities; that 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, in light of the current economic
crises, there will be no material adverse change in our operations or business.
Assumptions relating to the foregoing involve judgment with respect to, among other
things, future economic, competitive and market conditions, and future business decisions,
all of which are difficult or impossible to predict accurately and many of which are
beyond our control. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information should not
be regarded as a representation by us or any other person that our objectives or plans
will be achieved. Factors that could cause actual results to differ from our expectations
or projections include the risks and uncertainties relating to our business described in
this Annual Report on Form 20-F at Item 3.D, Key Information  Risk
Factors.

We
undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. In light of these
risks, uncertainties and assumptions, the forward-looking events discussed in this Annual
Report on Form 20-F might not occur.



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# TABLE OF CONTENTS

|           |                                                                              | Page
|---------- | ---------------------------------------------------------------------------- | ----
|
|
|
|
|PART I     |                                                                              | 1   
|          
|ITEM 1.    | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        | 1   
|ITEM 2.    | OFFER STATISTICS AND EXPECTED TIMETABLE                                      | 1   
|ITEM 3.    | KEY INFORMATION                                                              | 1   
|ITEM 4.    | INFORMATION ON THE COMPANY                                                   | 15  
|ITEM 4A.   | UNRESOLVED STAFF COMMENTS                                                    | 26  
|ITEM 5.    | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 27  
|ITEM 6.    | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 36  
|ITEM 7.    | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 43  
|ITEM 8.    | FINANCIAL INFORMATION                                                        | 45  
|ITEM 9.    | THE OFFER AND LISTING                                                        | 46  
|ITEM 10.   | ADDITIONAL INFORMATION                                                       | 47  
|ITEM 11.   | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 62  
|ITEM 12.   | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 63  
|          
|PART II    |                                                                              | 63  
|          
|ITEM 13.   | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 63  
|ITEM 14.   | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 63  
|ITEM 15.   | CONTROLS AND PROCEDURES                                                      | 63  
|ITEM 16A.  | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 64  
|ITEM 16B.  | CODE OF ETHICS                                                               | 64  
|ITEM 16C.  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 64  
|ITEM 16D.  | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 65  
|ITEM 16E.  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 65  
|ITEM 16F.  | CHANGE IN THE REGISTRANT'S CERTIFYING ACCOUNTANT                             | 65  
|ITEM 16G.  | CORPORATE GOVERNANCE                                                         | 65  
|          
|PART III   |                                                                              | 65  
|          
|ITEM 17.   | FINANCIAL STATEMENTS                                                         | 65  
|ITEM 18.   | FINANCIAL STATEMENTS                                                         | 65  
|ITEM 19.   | EXHIBITS                                                                     | 66  
|          
|SIGNATURES |                                                                              | 67  

- i -

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# PART I

|ITEM 1. |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- |  | -----------------------------------------------------

Not
applicable.

|ITEM 2. |  | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- |  | ---------------------------------------

Not
applicable.

|ITEM 3. |  | KEY INFORMATION
|------- |  | ---------------

|A. | SELECTED
FINANCIAL DATA
|-- | -----------------------

The
following selected consolidated financial data is qualified by reference to and should be
read in conjunction with our audited consolidated financial statements and notes thereto
included elsewhere in this Annual Report on Form 20-F.

The
selected consolidated balance sheet data as of December 31, 2004, 2005 and 2006 and the
selected consolidated statement of operations data for the fiscal years ended December 31,
2004 and 2005 have been derived from our audited financial statements not included in this
Annual Report on Form 20-F. The selected consolidated balance sheet data as of December
31, 2007 and 2008 and the selected consolidated statement of income data for each of the
years ended December 2006, 2007 and 2008 have been derived from our audited consolidated
financial statements included elsewhere in this Annual Report on Form 20-F, which have
been prepared in accordance with accounting principles generally accepted in the United
States (U.S. GAAP) and audited by Kost, Forer, Gabbay & Kasierer, an
independent registered public accounting firm and a member firm of Ernst & Young
Global.

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

1

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(1) Includes the following stock-based compensation charges:

|                                      | Year ended December 31,
|------------------------------------- | -----------------------
|
|
|
|
|Cost of revenues                      |                        
|Research and development              |                        
|Selling and marketing                 |                        
|General and administrative            |                        
|                                      |                        
|Total stock-based compensation charge |                        

(2) Consists of settlement and litigation costs in 2005 associated with litigation with competitors,
and our secondary offering expenses.

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

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

Not
applicable.

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

Not
applicable.

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

This
Annual Report on Form 20-F contains certain statements that are intended to be, and are
hereby identified as, forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events, which are subject to risks and uncertainties. The Companys actual
future results may differ significantly from those stated or implied in any
forward-looking statements. Factors that may cause such differences include, but are not
limited to, the factors discussed below.

# Risks Related to Our
Business and Industry

Recent difficult conditions in the global
capital markets and the global economy materially affected our business and results of
operations and may continue to harm our ability to raise capital or debt.

As
widely reported, the global credit markets and financial services industry have been
experiencing a period of upheaval characterized by the bankruptcy, failure, collapse or
sale of various financial institutions, severely diminished liquidity and credit
availability, declines in consumer confidence, declines in economic growth, increases in
unemployment rates, and uncertainty about economic stability. Our results of operations
are materially affected by the current economic turmoil, both in the U.S. and elsewhere
around the world. The stress experienced by global capital markets substantially increased
in recent quarters. The global economic instability and uncertainty has had an adverse
effect on our revenues and there can be no assurance that there will not be further
deterioration in the global economy, credit and financial markets and confidence in
economic conditions. While the ultimate outcome of these events cannot be predicted, it
may have a material adverse effect on us and our ability to borrow money or raise
additional capital. Similarly, our customers and suppliers may experience financial
difficulties or be unable to borrow money to fund their operations, which may adversely
impact their ability or decision to purchase our product or to pay for our products that
they do purchase on a timely basis, if at all.

2

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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, treatment for the temporary
reduction in the appearance of cellulite, reduction in thigh circumference, and fat
removal. We introduced our first product, the Aurora, in December 2001, and since then,
have expanded our product offerings to include eleven additional product platforms:
Pitanga, Polaris, Galaxy, Comet, VelaSmooth, VelaShape, eLight, eLaser, eMax, LipoLite and
eMatrix. Two of these products were recently introduced, and it is difficult for us to
predict the success of these recently introduced products in the long term. Our failure to
significantly penetrate current or new markets with our products and manage the
manufacturing and distribution of multiple products could negatively impact our business,
financial condition and results of operations. The success of our products depends on
adoption and acceptance of our proprietary Electro-Optical Synergy, or ELOS 
technology and other technologies that we develop. The rate of adoption and acceptance may
be affected adversely by actual or 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
products.

To
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, ear, nose and throat specialists, other
specialists and non-medical professionals;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | identify
new markets and emerging technological trends in our target markets and react
                  effectively to technological changes; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------

| |  | maintain
effective sales and marketing strategies.
| | - | --------------------------------------------------

We
may be unable, however, to continue to develop new upgrades, products and technologies at
the rate we expect, or at all, which could adversely affect our expected growth rate. In
addition, the market for aesthetic devices is highly competitive and dynamic, and marked
by rapid and substantial technological development and product innovations. Demand for our
products could be diminished by equivalent or superior products and technologies offered
by competitors.

We may encounter difficulties in
managing our growth which could limit our ability to increase sales and cash flow.

In
previous years, we have experienced 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:

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

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

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

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

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

Continued
growth will 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 payors;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

3

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| |  | 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.

Our
success and ability to compete depends in large part upon our ability to protect our
proprietary technology. As of February 15, 2009, our patent portfolio consisted of 8
issued U.S. patents, one of which we purchased in December 2004 (with the corresponding US
and international family members), and 33 patent applications pending in the United States
(with an additional 31 applications pending internationally and 10 international patents),
related to 40 patent families relating to our technology and products. Our pending and
future patent applications may not issue as patents or, if issued, may not issue in a form
that will be advantageous to us. Any issued patents may be challenged, invalidated or
legally circumvented by third parties. We cannot be certain that our patents will be
upheld as valid and enforceable or prevent the development of competitive products.
Consequently, competitors could develop, manufacture and sell products that directly
compete with our products, which could decrease our sales and diminish our ability to
compete. In addition, competitors could purchase one of our products and attempt to
replicate some or all of the competitive advantages we derive from our development
efforts, design around our protected technology, or develop their own competitive
technologies that fall outside of our intellectual property rights. If our intellectual
property does not adequately protect us from our competitors products and methods,
our competitive position could be adversely affected, as could our business.

We
rely on a combination of patent and other intellectual property laws and confidentiality,
non-disclosure and assignment of inventions agreements, as appropriate, with our
employees, consultants and customers, to protect and otherwise seek to control access to,
and distribution of, our proprietary information. These measures may not be adequate to
protect our technology from unauthorized disclosure, third-party infringement or
misappropriation. We also rely on trade secret protection for our technology, in part
through confidentiality agreements with our employees, consultants and third parties.
However, these parties may breach these agreements, and we may not have adequate remedies
for any breach. Also, others may learn of our trade secrets through a variety of methods.
In addition, the laws of certain countries in which we develop, manufacture or sell our
products may not protect our intellectual property rights to the same extent as the laws
of the United States or Israel.

Existing and future third-party
claims of infringement or other claims against us could require us to redesign our
products, seek licenses, or engage in future costly intellectual property litigation,
which could impact our future business and financial performance.

Third
parties have claimed, and may from time to time claim, that our current or future products
infringe their patent or other intellectual property rights, and seek to prevent, limit or
interfere with our ability to make, use, sell or import our products. For example, one of
our competitors, Lumenis Ltd., sued us in 2002 for alleged unfair competition,
misappropriation of trade secrets and alleged patent infringement. In March 2004, without
admitting liability or any infringement of any of Lumenis Ltd.s patents, we entered
into a settlement to resolve this litigation and entered into a license agreement for
certain Lumenis patents, under which license fees were capped at $4.2 million. We paid in
full the total amount during 2005. Another competitor, Thermage, Inc. sued us for alleged
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.

In
July 2004, Shaldot Metal Works Ltd., a privately owned Israeli company, sued us and Dr.
Shimon Eckhouse, the chairman of our board of directors, claiming that our products
infringe Shaldots Israeli patent. Shaldot sued us for monetary damages and requested
an injunctive relief. In response we filed a counter claim against Shaldot. On October 9,
2007, without admitting any liability or infringement of the patent in suit, we entered
into a settlement to resolve this matter and entered into a license agreement with Shaldot
and its subsidiary, Qray Ltd., an Israeli medical start-up developing light-based products
that impact cellular tissue, to whom the patent was assigned. Under this license
agreement, we received a license to use and utilize the patent in any of our products. We
agreed to pay Qray a one-time license fee of $0.1 million. In addition, we entered into a
share purchase agreement with Shaldot and Qray whereby we invested $1.05 million in Qray
in consideration for shares representing to 9% of Qrays outstanding share capital.
If Qray meets certain milestones within three and a half years from the closing of the
transaction, we are obligated to invest an additional $0.45 million in Qray.

On
March 10, 2009 our subsidiary, Syneron Inc. was served with a complaint from Palomar
Medical Technologies, Inc. The complaint alleges infringement of US Patents Nos. 5,735,844
and 5,595,568 by hair removal products sold in the United States. These patents are each
currently being reexamined by the U.S. Patent and Trademark Office based on different
prior art. Syneron Inc.s response to the complaint is due May 10, 2009.

4

---

---

We
may also become involved in intellectual property litigation in the future. Although we
may try to resolve any potential future claims or actions as we did with the competitors
described above, we may not be able to do so on reasonable terms, if at all. Following a
successful third-party action for infringement, we may be required to pay substantial
damages and if we cannot obtain a license or redesign our products, we may have to stop
manufacturing, selling and marketing our products, and our business could suffer as a
result. Infringement and other intellectual property claims, with or without merit, can be
expensive and time-consuming to litigate, and could divert managements attention
from our core business. If we lose this kind of litigation, a court could require us to
pay substantial damages, and prohibit us from using technologies essential to our
products. Any of these events would have a material adverse effect on our business,
results of operations and financial condition. Furthermore, we do not know whether
necessary licenses would be available to us on satisfactory terms, or whether we could
redesign our products or processes to avoid infringement.

We
may become involved in litigation to protect the trademark rights associated with our
company name or the names of our products. We do not know whether others will assert that
our company name infringes their trademark rights. In addition, names we choose for our
products may be claimed to infringe names held by others. If we have to change the name of
our company or products, we may experience a loss in goodwill associated with our brand
name, customer confusion and a loss of sales.

We
may also become involved in litigation not only as a result of alleged infringement of a
third-partys intellectual property rights, but also to protect our own intellectual
property rights, which would divert our managements attention from our core business
and may be expensive and time consuming to litigate.

Please
see Item 8, Financial Information  Consolidated Statements and Other Financial
Information for further details regarding legal proceeding and the risk arising
under those proceedings.

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

Our
products compete against products offered by public companies, including Candela
Corporation, Cutera, Inc., Cynosure, Inc., Thermage, Inc., Palomar Medical Technologies,
Inc. and Lumenis Ltd., as well as by private companies such as Sciton, Inc., UltraShape
Ltd., Alma Lasers Ltd. and several other smaller specialized companies. Competition with
these companies could result in reduced prices and profit margins and loss of market
share, any of which could harm our business, financial condition and results of
operations. We also face competition from medical products, including Botox and collagen
injections, and aesthetic procedures, such as sclerotherapy, electrolysis 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.

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.

5

---

---

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 ourselves.
A supply interruption or an increase in demand beyond current suppliers capabilities
could harm our ability to manufacture our products until we identify and qualify a new
source of supply, which could take several months.

Any
interruption in the supply of components or materials, or our inability to obtain
substitute components or materials from alternate sources at acceptable prices 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, Asia, Australia, South Africa
and South America. We also depend on relatively new direct sales operations to sell our
products in North America. Therefore, we are subject to risks associated with having
worldwide operations. Substantially all of our revenue in 2006, 2007 and 2008 was
generated outside of Israel, primarily in North America, Western Europe and Asia. Only an
immaterial portion of our revenues in 2006, 2007 and 2008 was generated in Israel. Part of
our strategy is to expand our sales in existing markets and to enter new foreign markets.
Expansion of our international business will require significant management attention and
financial resources. Our international sales and operations subject us to many risks
inherent in international business activities, including:

| |  | foreign
certification and regulatory requirements;
| | - | --------------------------------------------------

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

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

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

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

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

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

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

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

In
addition, we face particular risks associated with doing business in international
markets, including, political instability and the threat of terror attacks. If our
international sales do not continue at the expected pace or suffer from higher challenges
than expected, we will not experience our projected growth or have decreased revenue and
our financial results will suffer.

6

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Exchange rate fluctuations could
have a material adverse impact on our results of operations.

A
majority of our revenues and a substantial portion of our expenses are denominated in U.S.
dollars. However, a portion of our revenues and a portion of our costs, including
personnel and some marketing and facilities expenses, are incurred in New Israeli Shekels
and Euros. Inflation in Israel or Europe or a weakening of the U.S. dollar against other
currencies may have the effect of increasing the U.S. dollar cost of our operations in
that jurisdiction, which may have a material adverse impact on our results of operations.
During 2008, the New Israeli Shekel (average annual rate) appreciated against the U.S.
dollar by approximately 14% compared to 2007, which contributed to an approximately 6%
increase of operating expenses. In addition, during 2008, the Euro depreciated against the
U.S. dollar by approximately 7%, which contributed to a decrease of approximately 2% in
annual sales. Since the beginning of 2009, through February 15, 2009 the New Israeli
Shekel depreciated against the U.S. dollar by approximately 6.5%, and the Euro depreciated
against the U.S. dollar by approximately 12%. If the U.S. dollar continues to strengthen
in value in relation to the shekel, it will become less expensive for us to fund our
operations in Israel. If the Euro continues to depreciate against the U.S. dollar it will
decrease our revenues from operations.

Although
we use hedging techniques to reduce the risk associated with fluctuations in currency
exchange rates, we may not be able to eliminate the effects of currency fluctuations. Thus
exchange rate fluctuations could have a material adverse impact on our results of
operations.

Any acquisition that we make could
harm our business and hurt our financial condition.

From
time to time, we evaluate potential strategic acquisitions of technologies and products.
We also consider entering into joint venture agreements and other collaborations. We may
not be able to identify appropriate targets or strategic partners, or successfully
negotiate, finance or integrate any such products or technologies. Any acquisition that we
pursue could diminish our cash position and divert managements time and attention
from our core operations.

If we fail to obtain and maintain
necessary U.S. Food and Drug Administration clearances for our products and indications,
if clearances for future products and indications are delayed or not issued, or if there
are U.S. federal or state level regulatory changes, our commercial operations could be
harmed.

Most
of our products are medical devices subject to extensive regulation in the 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 pre-market approval (PMA) from the FDA, unless an exemption
applies. Either process can be expensive and lengthy. The FDAs 510(k) clearance
process usually takes from three to twelve months, but it can last longer. The process of
obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and it
generally takes from one to three years, or even longer, from the time the application is
filed with the FDA. To date, none of our devices passed via PMA and we believe that very
few of our currently planned products are subject to PMA by the FDA. All products that we
currently market in the United States have received 510(k) clearance for the uses for
which they are marketed or are products with minor modifications from our cleared products
and are therefore covered by Letter to File. In June 2005, the FDA granted 510(k)
clearance to our Vela platform for the temporary reduction in the appearance of cellulite
and for the relief of minor muscle aches, pain and spasms, as well as the temporary
improvement of local blood circulation. In March 2006, the FDA granted 510(k) clearance to
our new ST applicator for non-invasive wrinkle treatment a technique related to our
ReFirme procedure. In July 2007, the FDA granted 510(k) clearance to our VelaSmooth
product for temporary reduction of thigh circumferences, and in August 2007, the FDA
granted 510(k) clearance to our VelaShape for all uses of our VelaSmooth product. As a
result of these 510(k) clearances, we are now permitted to sell the Vela platform and our
ReFirme procedure using our new ST applicator in the United States to physicians. In
May 2008, the FDA granted 510(k) to our new LipoLite product for laser-assisted lipolysis
and additional dermatological procedures. In September 2008, the FDA granted 510(k)
clearance to our Matrix RF applicator for use in dermatological procedures requiring
ablation and resurfacing of the skin. In October 2006, the FDA granted 510(k) clearance to
our LiteTouch product for dental laser treatment. As a result of this 510(k) clearance, we
are now permitted to sell our LiteTouch product to dentists in the United States.

Medical
devices may be marketed only for the indications for which they are approved or cleared.
We have obtained 510(k) clearance for the current treatments for which we offer our
products. However, our clearances can be revoked if safety or effectiveness problems
develop. Any modifications to an FDA-cleared device that would significantly affect its
safety or effectiveness or that would constitute a major change in its intended use would
require a new 510(k) clearance or possibly PMA. We may not be able to obtain additional
510(k) clearances or PMAs for new products or for modifications to, or additional
indications for, our existing products in a timely fashion, or at all. Delays in obtaining
future clearances would adversely affect our ability to introduce new or enhanced products
in a timely manner, which in turn would harm our revenue and future profitability.

We
have made modifications to our devices in the past and may make additional modifications
in the future that we believe do not or will not require additional clearances or
approvals. If the FDA disagrees, and requires new clearances or approvals for the
modifications, we may be required to recall and to stop marketing the modified devices. We
also are subject to Medical Device Reporting regulations, which require us to report to
the FDA if our products cause or contribute to a death or serious injury, or malfunction
in a way that would likely cause or contribute to a death or serious injury. Our products
and/or their use are also subject to state regulations, which are, in many instances, in
flux. Changes in state regulations may impede sales. We cannot predict the impact or
effect of future legislation or regulations at the federal or state levels.

7

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The
FDA and state authorities have broad enforcement powers. Our failure to comply with
applicable regulatory requirements could result in enforcement action by the FDA or state
agencies, which may include any of the following sanctions:

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

| |  | repair,
replacement, refunds, recall or seizure of our products;
| | - | ----------------------------------------------------------------

| |  | issuing
an import alert to block entry of products the FDA has reason to believe violate
                  applicable regulatory requirements;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| |  | criminal
prosecution.
| | - | ---------------------

If
any of these events were to occur, it could harm our business.

If we or our subcontractors fail
to comply with the FDAs Quality System Regulation and performance standards,
manufacturing operations could be halted, and our business would suffer.

We
and our subcontractors are required to demonstrate and maintain compliance with the
FDAs Quality System Regulation, or QSR. The QSR is a complex regulatory scheme that
covers the methods and documentation of the design, testing, control, manufacturing,
labeling, quality assurance, packaging, storage and shipping of our products. Because our
products use optical energy, including lasers, our products also are covered by a
performance standard for lasers set forth in FDA regulations. The laser performance
standard imposes specific record-keeping, reporting, product testing and product labeling
requirements. These requirements include affixing warning labels to laser products, as
well as incorporating certain safety features in the design of laser products. The FDA
enforces the QSR and laser performance standards through periodic unannounced inspections.
We and our subcontractors are subject to such inspections. Although we place our own
quality control employee at each of our subcontractors facilities, we do not have
complete control over our subcontractors compliance with these standards. Any
failure by us or our subcontractors to take satisfactory corrective action in response to
an adverse QSR inspection or to comply with applicable laser performance standards could
result in enforcement actions against us or our subcontractors, including a public warning
letter, a shutdown of manufacturing operations, a recall of our products, civil or
criminal penalties, or other sanctions, such as those described in the preceding
paragraph, which could cause our sales and business to suffer. In addition, we are subject
to standards imposed on our activities outside of the United States, such as obtaining CE
certification for the quality of our systems and products from the European authorizing
body (KEMA) and electrical and safety certification from the Standards Institution of
Israel, and failure to comply with such standards could adversely impact our business.

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

Sales
of our products outside the 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 for obtaining clearance or approvals, if required by other countries,
may be longer than that required for FDA clearance or approvals, and requirements for such
clearances or approvals may significantly differ from FDA requirements. Although we have
obtained regulatory approvals in the European Union and other countries outside the United
States, such as approvals for the use of our Aurora, Polaris, VelaSmooth, Galaxy and Comet
product platforms in Korea and approvals for the use of our Aurora and Polaris product
platforms in China, we may be unable to maintain regulatory qualifications, clearances or
approvals in these countries or to obtain approvals in other countries. We also may incur
significant costs in attempting to obtain and in maintaining foreign regulatory approvals
or qualifications. If we experience delays in receiving necessary qualifications,
clearances or approvals to market our products outside the United States, or if we fail to
receive those qualifications, clearances or approvals, we may be unable to market some of
our products or enhancements in certain international markets effectively, or at all.

New regulations may limit our
ability to sell to non-physicians.

We
sell our products to physicians and, outside the United States, to aestheticians. In
addition, we sell our products in the developing U.S. medical spa market, where aesthetic
procedures are being performed at dedicated facilities by non-physicians under physician
supervision. However, U.S., state and international regulations could change at any time,
disallowing sales of our products to aestheticians, and limiting the ability of
aestheticians and non-physicians to operate our products. We cannot predict the impact or
effect of changes in U.S., state or international laws or regulations.

8

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Because we do not require training
for users of our products, and we also 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,
and we have no way to confirm that adequate supervision occurs. The lack of required
training and the purchase and use of our products by non-physicians may result in product
misuse and adverse treatment outcomes, which could harm our reputation and expose us to
costly product liability litigation.

Product liability suits could be
brought against us due to defective material or design, or due to misuse of our products,
and could result in expensive and time-consuming litigation, payment of substantial
damages and an increase in our insurance rates.

If
our products are defectively designed, manufactured or labeled, contain defective
components or are misused, we may become subject to substantial and costly litigation by
our customers or their patients. Misusing our products or failing to adhere to operating
guidelines could cause significant eye and skin damage, and underlying tissue or organ
damage. In addition, if our operating guidelines are found to be inadequate, we may be
subject to liability. We have been involved, and may in the future be involved, in claims
related to the use of our products. Product liability claims could divert
managements attention from our core business, be expensive to defend and result in
sizable damage awards against us. We have been involved in a number of disputes or legal
claims between our customers and their patients that involved potential product liability
claims since inception. To date, none of these disputes resulted in legal verdicts against
us, although in some cases payments were made or might be made by an insurance carrier. We
may not be able to obtain insurance in amounts or scope sufficient to provide us with
adequate coverage against all potential liabilities. Any product liability claims brought
against us, with or without merit, could increase our product liability insurance rates or
prevent us from securing continuing coverage, could harm our reputation in the industry
and reduce product sales. Product liability claims in excess of our insurance coverage
would be paid out of cash reserves harming our financial condition and reducing our
operating results.

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 and inventory.

Our
subcontractors keep limited materials and components on hand. To help them manage their
manufacturing operations and minimize inventory costs, we forecast anticipated product
sales to predict our inventory needs up to nine months in advance and enter into purchase
orders on the basis of these requirements with limitation of components lead time and long
lead items. We also accept one month safety stock of raw material above lead time. Our
historical experience may not provide us with sufficient 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.

9

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In order to effectively manage our
collaboration with Procter & Gamble, we may divert the attention of key technical
personnel and management from the core business. If Procter & Gamble terminates the
agreement, our share price could fall, and we may be unable to bring a home-use device to
the market.

Effective
February 25, 2007, we entered into a Joint Development and Supply Framework Agreement with
the Procter & Gamble Company for the commercialization of patented and patent pending,
ELOS-based, home-use devices and compositions for the enhancement of skin appearance
through the treatment of fine lines, wrinkles, age and sun spots and cellulite. Under the
agreement, significant resources and the attention of key technical personnel and
management will be directed to the development of such devices even though such devices
may not be commercialized for several years, if ever. In addition, we cannot be sure that
the agreement will result in marketable products or that we will receive payments for any
products developed pursuant to the agreement. Procter & Gamble has the option under
certain circumstances to terminate the agreement, including following the failure by us to
successfully complete two milestones, and may exercise that option. If Procter &
Gamble terminates the agreement, the price of our ordinary shares could fall
significantly, and we will not receive certain royalty and other payments provided for in
the agreement. If Procter & Gamble terminates the agreement, we may decide to proceed
to develop and commercialize the device on our own or with a third party. However, there
can be no assurance that we will be able to successfully implement such a decision and
successfully bring a home-use device to the market.

We have invested a portion of our
cash in auction-rate securities, which subjects us to liquidity and investment risk. Due
to recent uncertainties in the capital markets regarding auction-rate securities, we
recorded an impairment charge in the fourth quarter of 2007 and during 2008, and, if the
fair value of these investments were to decline further, we could be required to record
further impairment charges related to these investments.

The
performance of the capital markets affects the values of funds that are held in marketable
securities. These assets are subject to market fluctuations and will yield uncertain
returns, which may fall below our projected return rates. Due to recent market
developments, including a series of rating agency downgrades, the fair value of these
investments may decline. We expect that market conditions will continue to fluctuate and
that the fair value of our investments may be impacted accordingly.

As
of February 15, 2009, we held approximately $9.5 million in auction-rate securities, which
consist of interests in collateralized debt obligations supported by pools of residential
and commercial mortgages or credit cards, insurance securitizations and other structured
credits, including corporate bonds. Auction-rate securities are floating rate debt
securities with long-term nominal maturities for which the interest rates are reset from
time to time through a competitive bidding process often referred to as a Dutch
auction. These periodic auctions have historically provided a liquid market for
auction-rate securities, as this mechanism generally allows existing investors to rollover
their holdings and continue to own their respective securities at then-existing market
rates or to liquidate their holdings by selling their securities at par value. As part of
the ongoing credit market crisis, a number of auction-rate securities from various issuers
have failed to receive sufficient order interest from potential investors to clear
successfully, resulting in auction failures. Historically, when investor demand was
insufficient, the banks running the auctions would step in and purchase the remaining
securities to prevent an auction failure. Recently, however, banks have been allowing
these auctions to fail.

While
the auction-rate securities held by us had AAA/Aaa credit ratings at the time of our
purchase of these securities, the auction-rate securities held by us have experienced
multiple failed auctions, as the amount of these auction-rate securities submitted for
sale exceeded the amount of purchase orders for these auction-rate securities. As a
result, we recorded a pre-tax impairment charge of approximately $5.8 million in the
fourth quarter of 2007 and an additional $1.6 million during 2008. We cannot predict when
the liquidity of these auction-rate securities will improve. We continue to monitor the
market for auction-rate securities although there is no current secondary market for such
securities. If the fair value of these investments were to decline, management would be
required to evaluate whether such decline is other than temporary. The amount
of any impairment loss which is determined to be other than temporary would be immediately
recorded in the consolidated statement of operations. Such an impairment charge could
materially and adversely affect our consolidated financial condition and results of
operations. See Note 3 of the notes to our consolidated financial statements for further
information. A portion of our liquidity will be adversely affected to the extent that
auctions for our auction-rate securities experience further failures.

10

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We may fail to maintain effective
internal control over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002.

The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.
Our efforts to comply with the requirements of Section 404, which started in connection
with our Annual Report on Form 20-F for the fiscal year ended December 31, 2006, have
resulted in increased general and administrative expense and a diversion of management
time and attention, and we expect these efforts to require the continued commitment of
resources. Section 404 of the Sarbanes-Oxley Act of 2002 requires (i) managements
annual review and evaluation of our internal control over financial reporting and (ii) a
statement by management that its independent registered public accounting firm has issued
an attestation report on our internal control over financial reporting, in connection with
the filing of our Annual Report on Form 20-F for each fiscal year. We have documented and
tested our internal control systems and procedures in order for us to comply with the
requirements of Section 404. While our assessment of our internal control over financial
reporting resulted in our conclusion that as of December 31, 2008, our internal control
over financial reporting was effective, we cannot predict the outcome of our testing in
future periods. If we fail to maintain the adequacy of our internal controls, we may not
be able to ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting. Failure to maintain effective internal control over
financial reporting could result in investigation or sanctions by regulatory authorities,
and could have a material adverse effect on our operating results, investor confidence in
our reported financial information, and the market price of our ordinary
shares.

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

Our
success also depends in large part on our ability to continue to attract, retain and
motivate qualified engineering and other highly skilled technical and professional
personnel. Competition for certain employees, particularly sales representatives and
development engineers, is intense. We may be unable to continue to attract and retain
sufficient numbers of highly skilled employees. Our inability to attract and retain
additional key employees or the loss of one or more of our current key employees could
adversely affect our business, financial condition and results of operations.

Under
current U.S., Canadian 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., Canadian
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 that our
former employees gained while working for us. For example, in the past, Israeli courts
have required employers seeking to enforce non-compete undertakings of a former employee
to demonstrate that the competitive activities of the former employee will harm one of a
limited number of material interests of such employer which have been recognized by the
courts, such as the secrecy of a companys confidential commercial information or
intellectual property. If we are unable to demonstrate that harm would be caused to us or
otherwise enforce these non-competition agreements, in whole or in part, we may be unable
to prevent our competitors from benefiting from the expertise of our former employees,
which could harm our business.

# Risks Related to Our
Operations in Israel

Political, economic and military
instability in Israel may impede our ability to operate and harm our financial results.

We
are incorporated under the laws of the State of Israel and our principal executive offices
and research and development facilities are located in Israel. In addition, all of our
subcontractors are located in Israel. Accordingly, political, economic and military
conditions in Israel may directly affect our business. The Israeli economy has suffered in
the past and may suffer in the future from instability, which may adversely affect our
financial condition and results of operations.

Following
the recession and the instability that characterized the Israeli economy during the years
2001 and 2003, the Israeli economy showed signs of improvement during 2004, 2005, 2006 and
2007. However, in recent quarters, the global economic recession, instability and
uncertainty has affected the economic conditions in Israel and it is currently expected
that such conditions will continue in Israel throughout 2009. If the economic
deterioration in Israel continues, it may adversely affect our financial conditions, the
results of operations and our ability to obtain financing from Israeli banks.

In
addition, since the establishment of the State of Israel in 1948, a number of armed
conflicts have occurred between Israel and its Arab neighbors. Any hostilities involving
Israel or the interruption or curtailment of trade between Israel and its present trading
partners could affect adversely our operations. Since October 2000, terrorist violence in
Israel has increased significantly, primarily in the West Bank and Gaza Strip, and Israel
has experienced terrorist incidents within its borders. Recently, there has been a further
escalation in violence among Israel, Hamas, the Palestinian Authority and other groups. In
addition, in July 2006, there have been extensive hostilities along Israels northern
border with Lebanon and to a lesser extent in the Gaza Strip. Since June 2007, the Hamas
militant group has taken over the Gaza Strip from the Palestinian Authority, and the
hostilities along Israels border with the Gaza Strip have increased, escalating to a
wide scale attack by Israel in December 2008, in retaliation to rocket attacks into
southern Israel. Ongoing and revived hostilities or other Israeli political or economic
factors could harm our operations and product development and cause our sales to decrease.
Furthermore, several countries, principally those in the Middle East, still restrict
business with Israel and Israeli companies. These restrictive laws and policies may limit
seriously our ability to sell our products in these countries.

11

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You may have difficulties
enforcing a U.S. judgment against us and/or our executive officers and directors or
asserting U.S. securities laws claims in Israel.

A
significant portion of our assets and the assets of our directors and executive officers
are located outside the United States. Therefore, a judgment obtained against us or any of
them in the United States, including one based on the civil liability provisions of the
U.S. federal securities laws, may not be collectible in the United States and may not be
enforced by an Israeli court. Further, if a foreign judgment is enforced by an Israeli
court, it will be payable in Israeli currency. It also may be difficult for you to assert
U.S. securities law claims in original actions instituted in Israel.

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

Many
of our executive officers and employees in Israel are obligated to perform annual military
reserve duty in the Israeli Defense Forces and may be called to active duty under
emergency circumstances at any time. If a military conflict or war arises, these
individuals could be required to serve in the military for extended periods of time. Our
operations could be disrupted by the absence for a significant period of one or more of
our executive officers or key employees or a significant number of our other employees due
to reserve duty. Any disruption in our operations may harm our business.

The tax benefits available to us
require us to meet several conditions and may be terminated or reduced in the future,
which would increase our costs and taxes.

We
have generated income and are able to take advantage of tax exemptions and reductions
resulting from the Approved Enterprise and Benefited Enterprise
status of our facilities in Israel. To remain eligible for these tax benefits, we must
continue to meet certain conditions, including making specified investments in property
and equipment. If we fail to meet these conditions in the future, the tax benefits would
be canceled and we could be required to refund any tax benefits we might already have
received. In addition, these tax benefits may not be continued in the future at their
current levels or at any level. The termination or reduction of these tax benefits may
increase our expenses in the future, which would reduce our expected profits or increase
our losses. Additionally, if we increase our activities outside of Israel, for example, by
future acquisitions, our increased activities generally will not be eligible for inclusion
in Israeli tax benefit programs. Under our first tax benefit plan, we have invested
approximately $720,000 in fixed assets of which $223,000 was from paid-in capital as
required by the financing condition of the approved plan. Under our next two tax benefit
plans, which were approved under the amendment to the law of the Engorgement of Capital
Investment 1959, we invested approximately $529,000 during 2004 and 2005 under the second
plan and approximately $1,138,000 during 2006 and 2007 under the third plan. 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 received
from 2000 to 2003 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, the restrictions may impair
our ability to consummate a merger or similar transaction in which the surviving entity is
not an Israeli company. In addition, if we fail to comply with any of the conditions
imposed by the Office of the Chief Scientist, we may be required to refund any grants
previously received together with interest and penalties, and may be subject to criminal
charges. In addition, in recent years, the government of Israel has accelerated the rate
of repayment of Chief Scientist grants and may further accelerate them in the future. We
have not applied for any new grants since 2004 and currently have no plans to apply for
such grants.

Provisions of our articles of
association, our shareholder rights plan, and Israeli law may delay, prevent or make
difficult an acquisition of Syneron, which could prevent a change of control and
negatively affect the price of our ordinary 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. Our articles of association contain provisions that may make
it more difficult to acquire our company, such as classified board provisions. As noted
above, the transfer of our technology (including by acquisition) is subject to certain
restrictions and approvals of the Office of the Chief Scientist, which provided grants for
the development of our technology.

12

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In
November 2008, our board of directors adopted a shareholder rights plan, under which our
board of directors declared a dividend of one right for each ordinary share held by
shareholders of record as of the close of business on November 9, 2008. Initially, these
rights will not be exercisable and will trade with our ordinary shares. Under the plan,
these rights will generally be exercisable only if a person or group acquires beneficial
ownership of 15 percent or more of our ordinary shares or commences a tender or exchange
offer for 15 percent or more of our ordinary shares, except if such person or group has
become an Acquiring Person pursuant to an offer approved by the majority of
the board of directors. If a person or group acquires beneficial ownership of 15 percent
or more of our ordinary shares (except if such person or group has become an
Acquiring Person pursuant to an offer approved by the majority of the board of
directors), each right will generally entitle the holder, other than the acquiring person
or group, to acquire, for the exercise price of $0.01 per share (subject to adjustment as
provided in the plan), two (2) ordinary shares. In addition, if, after a person acquires
such ownership, we engage in a merger in which we are not the survivor or our ordinary
shares are changed or exchanged, or we sell or transfer more than 50 percent of our assets
or earning power, each right will generally entitle the holder, other than the acquiring
person or group, to acquire, for the exercise price of $0.01 per share (subject to
adjustment as provided in the plan), two (2) times the shares of the acquiring company to
which each of our shareholders is entitled to for each ordinary shares. Our board of
directors may redeem the rights at a price of $.0001 per right at any time up to ten days
after a person or group acquires beneficial ownership of 15 percent or more of our
ordinary shares. The rights plan will continue in effect until November 9, 2009 unless
earlier redeemed or amended by our board of directors.

Furthermore,
Israeli tax considerations may make potential transactions unappealing to us or to some of
our shareholders. See Item 10.B, Additional Information  Memorandum and
Articles of Association. for additional discussion about some anti-takeover effects
of Israeli law.

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

The rights and responsibilities of
our shareholders are governed by Israeli law and differ in some respects from the rights
and responsibilities of shareholders under U.S. law.

We
are incorporated under Israeli law. The rights and responsibilities of holders of our
ordinary shares are governed by our articles of association and by Israeli Companies Law,
5759-1999 (Companies Law). These rights and responsibilities differ in some respects from
the rights and responsibilities of shareholders in typical U.S. corporations. In
particular, pursuant to the Companies Law each shareholder of an Israeli company has to
act in good faith in exercising his or her rights and fulfilling his or her obligations
toward the company and other shareholders and to refrain from abusing his power in the
company, including, among other things, in voting at the general meeting of shareholders
and class meetings, on amendments to a companys articles of association, increases
in a companys authorized share capital, mergers, and transactions requiring
shareholders approval under the Companies Law. In addition, a controlling
shareholder of an Israeli company or a shareholder who knows that it possesses the power
to determine the outcome of a shareholder vote or who has the power to appoint or prevent
the appointment of a director or officer in the company, or has other powers toward the
Company has a duty of fairness toward the company. However, Israeli law does not define
the substance of this duty of fairness. Because Israeli corporate law has undergone
extensive revision in recent years, there is little case law available to assist in
understanding the implications of these provisions that govern shareholder behavior.

# Risks Related to Our
Ordinary Shares

The price of our ordinary shares
has fluctuated substantially and we expect will continue to do so.

The
market price for our ordinary shares has been, and may continue to be, volatile. The
market price for our ordinary shares has been, and we expect will continue to be, affected
by a number of factors, including:

| |  | the
gain or loss of significant orders or customers;
| | - | ----------------------------------------------------

| |  | recruitment
or departure of key personnel;
| | - | ------------------------------------------

| |  | the
announcement of new products or service enhancements by us or our competitors;
| | - | ----------------------------------------------------------------------------------

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

13

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In
addition, the stock prices of many companies in the medical device industry have
experienced wide fluctuations that often have been unrelated to the operating performance
of those companies. These factors and price fluctuations may materially and adversely
affect the market price of our ordinary shares.

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

Our
directors and executive officers, along with our two largest shareholders, in the
aggregate, beneficially owned or controlled approximately 11.92% of our outstanding
ordinary shares as of February 15, 2009. 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 any
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 ordinary shares.

We
have never paid cash dividends on our ordinary shares and do not anticipate paying cash
dividends on our ordinary shares in the foreseeable future. The payment of dividends on
our ordinary shares will depend on our earnings, financial condition and other business
and economic factors affecting us at such time as our board of directors may consider
relevant. Furthermore, 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
Companies Law, and, provided that the distribution is not reasonably expected to impair
our ability to fulfill our outstanding and expected obligations. If we do not pay
dividends, our ordinary shares may be less valuable because a return on your investment
will only occur if our share price appreciates. We have decided to reinvest the amount of
tax exempt income derived from our Approved Enterprise 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, Additional Information
 Taxation  United States Federal Income Tax Considerations  Passive
Foreign Investment Company Considerations.

14

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

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

# Our History

Syneron
Medical Ltd. was incorporated in the State of Israel in July 2000. Our headquarters are
located at Industrial Zone, Yokneam Illit, 20692, Tavor Building P.O.B. 550, Israel. Our
phone number is (972-73) 24-42200. The agent for service of process in the United States
is Syneron Inc., which is 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. The
reference to our website is an inactive textual reference only, and the information
contained on our website or available through our website is not incorporated by reference
into this Annual Report on Form 20-F and should not be considered a part of this Annual
Report on Form 20-F.

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

We
design, develop and market innovative aesthetic medical products based on our various
technologies including our proprietary ELOS technology, which uses the synergy between
electrical energy, including radiofrequency or RF energy, and optical energy to provide
effective, safe and affordable aesthetic medical treatments. Our products, which we sell
primarily to physicians and other practitioners, target a wide array of non-invasive
aesthetic medical procedures, including hair removal, wrinkle reduction, rejuvenation of
the skins appearance through the treatment of superficial benign vascular and
pigmented lesions, acne treatment, treatment of leg veins, treatment for the temporary
reduction in the appearance of cellulite and thigh circumference, ablation and resurfacing
of the skin and one minimally invasive product, which we introduced in February 2008, for
laser-assisted lipolysis. We believe ELOS provides performance advantages over existing
technologies that rely solely on optical energy. We believe using optical energy alone
limits the safety and efficacy of many aesthetic medical procedures due to limited skin
penetration and unwanted epidermal absorption. Our proprietary ELOS technology, which
combines optical and electrical energy, enhances the users ability to accurately
target the tissue to be treated and enables real-time measurement of skin temperature,
resulting in increased patient safety and comfort and improved treatment results.

During
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 permitted to sell
the Vela in the United States to physicians.

On
March 8, 2005, certain selling shareholders completed a secondary offering, in which such
selling shareholders sold an aggregate of 7,937,809 ordinary shares, including an
aggregate of 1,264,174 shares that were exercised by option holders.

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In
July 2005, we entered into an agreement to invest $1.5 million in Light Instruments Ltd.
(Light Instruments), an Israeli start-up specializing in the development of
advanced dental laser devices, in consideration for approximately 51% of Light
Instruments outstanding share capital. As part of the investment agreement, we
received the exclusive North American marketing and sales rights for 10 years following
FDA clearance of Light Instruments product used for the treatment of oral soft and
hard tissue. In July 2007, we entered into a share purchase agreement to purchase an
additional 44% of Light Instruments outstanding share capital in consideration for
an aggregate amount of up to $4.5 million. In October, 2008 we purchased an additional 5%
of Light Instruments outstanding share capital, and we currently own 100% of Light
Instrument.

Also,
in the first quarter of 2006, we launched three new platforms to address medical aesthetic
applications based on our ELOS technology. The eLight platform combines broad
spectrum light with bi-polar radio frequency. The system provides a full facial solution
for skin rejuvenation, including the treatment of superficial vascular and pigmented
lesions and acne applications. It also supports hair removal applications. The system also
includes a new skin tightening modality using wrinkle reduction  the ST, which
received FDA clearance in March 2006.

The
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 eMax platform combines bi-polar radio
frequency with multiple forms of broad spectrum light energy and diode laser energy to
deliver the complete range of Synerons ELOS modalities in one multi-platform system.
All the applications on the eLight, eLaser and eMax have received 510(k) clearance from
the FDA. In October 2006, the FDA granted 510(k) clearance to our LiteTouch platform which
is a dental laser system. As a result of this 510(k) clearance we are now permitted to
sell the LiteTouch in the United States to dentists.

Effective
February 25, 2007, we entered into an exclusive Joint Development and Supply Framework
Agreement with the Procter & Gamble Company for the commercialization of patented and
patent pending, ELOS-based, home-use devices and compositions for the enhancement of skin
appearance through the treatment of fine lines, wrinkles, age and sun spots and cellulite.
Under the terms of the agreement we will lead the research, development and manufacturing
of the devices, while Procter & Gamble will focus on the development of the
compositions that may be used in conjunction with our devices, marketing, and distribution
of the devices. The agreement provides that Procter & Gamble will purchase the devices
exclusively from us. The devices will be marketed under the Procter & Gamble family of
skin care products and will be co-branded with our ELOS technology. The agreement
contemplates further collaboration between Procter & Gamble that could lead to
commercializing additional products in the future. Procter & Gamble may terminate the
agreement in certain circumstances, including following the failure to successfully
complete two milestones.

On
April 10, 2007, we entered into an agreement with Fluorinex Active Ltd., an Israeli-based
start-up that develops advanced fluoridation and tooth whitening devices for dentists and
consumers, under which we purchased 38.47% of Fluorinexs then outstanding share
capital in consideration of $1.5 million and received a warrant to purchase an additional
3.85% of Fluorinexs then outstanding share capital. Fluorinex has developed a unique
device that delivers fluoride ions directly to the tooth enamel via a sophisticated
electro-chemical technique. In September 2008, Fluorinex received FDA approval for its
product. In December 2008 we exercised the warrant granted to us by Fluorinex, and we
currently hold 42.32% of Fluorinexs outstanding share capital. The Fluorinex
technology delivers the maximum amount of fluoride ions to the tooth, for the longest
endurance of time known today. Unlike other electro-chemical based fluoride systems, no
electric current passes through the patients tissue, thus enhancing the safety of
the device.

In
the second quarter of 2007, we introduced a new Matrix IR applicator for use with our eMax
and eLaser platforms. The Matrix IR combines fractional optical energy with radio
frequency for deep dermal heating for effective treatment of wrinkles. The collagen
remodeling caused by the Matrix IR treatment is designed for maximum effective penetration
for consistent and effective treatment for wrinkles.

In
August 2007, our Vela platform received FDA 510(k) pre-market clearance in the
United States and CE Mark certification in the European Union for the reduction of thigh
circumference (FDA) and body contouring (CE). This announcement marks the first FDA
clearance and CE mark certification for a product designed to reduce the circumference of
the body.

On
November 8, 2007, we announced our first share repurchase program. Under this share
repurchase program, we have repurchased, and may continue to repurchase our outstanding
ordinary shares up to an aggregate amount of $50.0 million. Our repurchases under this
share repurchase program may be made from time to time in the open market and may be
initiated and discontinued by us at any time. Under this share repurchase program, we
repurchased 588,000 ordinary shares of the Company at an aggregate price of $9.1 million.

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In
the first quarter of 2008, we completed the development our new Matrix RF
applicator. The Matrix RF applicator utilizes our fractional radio frequency technology to
provide fractional tissue heating at three ablation relative ratios, resulting in
effective ablation and resurfacing of the skin. The tunable applicator, equipped with our
SelecPulse, allows the user to adjust the relative ratio of ablation, as well as
direct heating, and to vary the treatment depth based upon desired clinical endpoints. The
Matrix RF applicator is the first bi-polar non-laser and non-light-based aesthetic device
capable of creating a tunable ablation impact, simulating the effects of different types
of ablative / coagulative lasers used for a range of aesthetic applications. These
applications include tightening and resurfacing with minimal or no downtime. Matrix RF is
being sold as an applicator add-on to all existing eLight, eLaser and eMax platforms. The
ergonomically designed headpiece will greatly increase ease of use for physicians
performing the treatments. The Matrix RF features a single-use disposable treatment tip.
Each applicator comes with 10 treatments tips at purchase. Treatment will most often be
performed around the eyes, mouth, and cheek, but can also be performed on the entire face
as well as other anatomical areas. The Matrix RF was the second product in our series of
ELOS fractional treatments, which currently includes the Matrix IR applicator. In
September 2008, our Matrix RF applicator received CE Mark certification in the European
Union and FDA clearance in the United States for use in dermatologic procedures for
wrinkle reduction by means of skin ablation and coagulation (CE) and use in dermatological
procedures requiring ablation and resurfacing of the skin (FDA). In the third quarter of
2008, we commenced selling our Matrix RF applicator.

In
the first quarter of 2008, we also completed the development of our new LipoLite platform.
Our LipoLite is a minimally invasive alternative and a complement to traditional
liposuction fat-removing procedures. The procedure requires only local anesthetic and is
designed to provide patients lasting results with little downtime and a high level of
safety. For our customers, the LipoLite product is comfortable to use, upgradable to
support future applications and fits easily on tabletops to save floor space in small
operating rooms. In May 2008, our LipoLite platform received FDA 510(k) clearance in the
United States for laser-assisted lipolysis and additional dermatological procedures. As a
result of this clearance, we are currently permitted to sell our LipoLite platform in the
United States. In the third quarter of 2008, we commenced selling our LipoLite platform in
the United States.

In
February 2008, we entered into an agreement with Rakuto Bio Technologies Ltd.
(RBT), an Israeli-based start-up that develops and advances a whole skin
complexion whitening treatment. Under the agreement, Syneron agreed to purchase an
aggregate of 31.57% of RBTs outstanding share capital in consideration for up to US$
3.0 million, and received a warrant to purchase an additional 6.32% of RBT outstanding
share capital. As of February 15, 2009, we hold 15.78% of RBTs outstanding share
capital. As part of the agreement, we have exclusive worldwide distribution rights to
RBTs currently developed product.

In
November 2008, we entered into an agreement with Inlight Corp, a San Diego-based
development and research company, under which we purchased 100% of Inlight Corp.s
outstanding share capital. We expect that Inlights innovative technology will enable
us to release unique and highly competitive skin rejuvenation products during the first
half of 2009. Inlight is currently developing a CO2 laser for fractional skin rejuvenation
and we expect to introduce the product in the first quarter of 2009. We can discuss the
fact that their first product to market will be a CO2 laser for fractional skin
rejuvenation and that we expect to introduce the product in the second quarter of 2009.

In
November 2008, we entered into a joint venture agreement for the formation of Syneron
China. Our partner in Syneron China is EverCare Medical Group, the largest aesthetic
hospital chain in China. Evercare operates cosmetic surgery hospitals throughout the
country and has been our distributor in China for the past two and a half years. Through
this new Chinese subsidiary, we will be able to sell directly to medical and aesthetic
professionals in China, including doctors, hospitals, medi-spas and cosmetic chains.
Syneron China will also provide training and after sales service and support. The first
two offices of Syneron China were opened in Beijing and Guangzhou in August 2008. In
addition, Syneron China intends to establish product demonstration centers in several
areas in China.

In
December 2008, we launched our new eMatrix treatment system, a portable touch-screen
device that allows physicians to program dermatological procedures requiring skin
resurfacing. The eMatrix utilizes our Matrix RF technology for fractional tissue heating
to provide ablation and effective resurfacing. With the SelectPulse feature, our customers
can tune eMatrix to any of three resurfacing programs, customizing the depth
of ablation and degree of skin resurfacing to each patients needs.

# Principal Capital
Expenditures

We
had capital expenditures of approximately $2.2 million in 2008, approximately $5.8 million
in 2007, and approximately $1.0 million in 2006. We expect that our capital expenditures
will be approximately $1.0 million in 2009. We have financed our capital expenditures with
cash generated from operations.

Our
capital expenditures in 2008 consisted of an acquisition of minority shares in
subsidiaries ($1.3 million), investments in affiliated companies ($1.6 million), and
purchase of computers and general equipment ($1.2 million). We expect our capital
expenditures in 2009 to consist of additional investments in our affiliated companies and
the purchase of computers and general equipment. Our capital expenditure in 2007 consisted
primarily of an acquisition of a minority share in a subsidiary ($ 3.6 million),
investments in affiliated companies ($2.6 million), leasehold improvements ($ 1.3
million), and purchase of computers and general equipment ($0.9 million). Our capital
expenditures in 2006 consisted primarily of purchases of software, manufacturing
equipment, lab equipment, test equipment, computers, software and enterprise resource
planning (ERP) software.

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

# Overview

We
design, develop and market innovative aesthetic medical products based on our proprietary
ELOS technology, which uses the synergy between electrical energy and optical energy to
provide effective, safe and affordable aesthetic medical treatments. Our products, which
we sell primarily to physicians and other practitioners, target a wide array of
non-invasive aesthetic medical procedures, including hair removal, wrinkle reduction,
rejuvenation of the skins appearance through the treatment of superficial benign
vascular and pigmented lesions, acne treatment, treatment of leg veins, treatment for the
temporary reduction in the appearance of cellulite and thigh circumference, skin
tightening, and one minimally invasive product, which we introduced in February 2008, for
laser-assisted lipolysis. We believe ELOS provides performance advantages over existing
technologies that rely solely on optical energy. We believe using optical energy alone
limits the safety and efficacy of many aesthetic medical procedures due to limited skin
penetration and unwanted epidermal absorption. The addition of radiofrequency energy, an
electrical energy, lessens absorption in the outer layer of skin, or epidermis, and allows
for greater skin penetration. Using radiofrequency and optical energy together enhances
the ability of the user to target, or select, accurately the tissue to be treated and
enables real-time measurement of skin temperature, enhancing patient safety and comfort.
Following the launch of our first product, the Aurora, based on our ELOS technology in
December 2001, our revenues were $11.5 million in 2002, $35.0 million in 2003, $57.9
million in 2004, $87.4 million in 2005, $117.0 million in 2006, $141.0 million in 2007 and
$115 million in 2008.

Our
family of aesthetic products is mostly 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 module in the console. We
seek to deliver to our users the ability to generate increased practice revenue through
additional service offerings. We also seek to provide predictable costs of ownership by
minimizing maintenance expenses and providing a parts and services warranty.

We
launched the Aurora, which was 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 product platforms.

In
2005, we introduced the VelaSmooth product platform in the United States and a few
upgrades for the Aurora, Galaxy and Comet product platforms. Our products address
traditional applications, including the rejuvenation of the skins appearance through
the treatment of superficial benign vascular and pigmented lesions, hair removal and the
treatment of leg veins, as well as newer applications, including wrinkle reduction, the
permanent reduction of hair, the temporary reduction in the appearance of cellulite and
the reduction of body circumference. Also, in the first quarter of 2006, we launched three
new platforms to address medical aesthetic applications based on our ELOS technology. The
eLight platform combines broad spectrum light with bi-polar radio frequency. The
system provides a full facial solution for skin rejuvenation, including the treatment of
superficial vascular and pigmented lesions, and acne applications. It also supports hair
removal applications. The system also includes a new skin tightening modality, the ST. The
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 eMax platform combines bi-polar radio
frequency with multiple forms of light energy and diode laser energy to deliver the
complete range of Synerons ELOS modalities in one multi-platform system. All the
applications on the eLight, eLaser and eMax have received 510(k) clearance from the FDA.
In August 2007, our Vela platform received FDA 510(k) pre-market clearance in the
United States and CE Mark certification in the European Union for the reduction of
circumference of the body. This announcement marks the first FDA clearance and CE mark
certification for a product designed to reduce the circumference of the body.

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

In
the second quarter of 2007, we completed the development of a new Matrix IR applicator for
use with our eMax and eLaser platforms. The Matrix IR combines fractional optical energy
with radio frequency for deep dermal heating for effective treatment of wrinkles. The
collagen remodeling caused by the Matrix IR treatment is designed for maximum effective
penetration for consistent and effective treatment for wrinkles.

In
the first quarter of 2008, we introduced our new Matrix RF applicator. The Matrix RF
applicator utilizes our fractional radio frequency technology to provide fractional tissue
heating at three ablation relative ratios, resulting in effective ablation and resurfacing
of the skin. The tunable applicator equipped with our SelecPulse, allows the user to
adjust the relative ratio of ablation, as well as direct heating, and to vary the
treatment depth based upon desired clinical endpoints. The Matrix RF applicator is the
first bi-polar non-laser and non-light-based aesthetic device capable of creating tunable
ablation impact, simulating the effects of different types of ablative / coagulative
lasers used for a range of aesthetic applications. These applications include tightening
and resurfacing, with minimal or no patient downtime. Matrix RF will be sold as an
applicator add-on to all existing eLight, eLaser and eMax platforms. The ergonomically
designed headpiece will greatly increase ease-of-use for physicians performing the
treatments. The Matrix RF will also feature a single-use disposable treatment tip. Each
applicator comes with 10 treatments tips at purchase. Treatment will most often be
performed around the eyes, mouth, and cheek, but can also be performed on the entire face
as well as other anatomical areas. The Matrix RF was the second product in our series of
ELOS fractional treatments, which currently includes the Matrix IR applicator.

18

---

---

In
the first quarter of 2008, we also introduced our new LipoLite platform. Our LipoLite is a
minimally invasive alternative and a complement to traditional liposuction fat-removing
procedures. The procedure requires only local anesthetic and is designed to provide
patients lasting results with little downtime and a high level of safety. For our
customers, the Lipolite product is comfortable to use, upgradable to support future
applications and fits easily on tabletops to save floor space in small operating rooms. In
May 2008, our LipoLite platform received FDA 510(k) clearance in the United States for
laser-assisted lipolysis and additional dermatological procedures. As a result of this
clearance, we are currently permitted to sell our LipoLite platform in the United States.
In the third quarter of 2008, we commenced selling our LipoLite platform in the United
States.

In
September 2008, our Matrix RF applicator received CE Mark certification in the European
Union and FDA clearance in the United States for use in dermatologic procedures for
wrinkle reduction by means of skin ablation and coagulation (CE) and use in dermatological
procedures requiring ablation and resurfacing of the skin (FDA).

In
December 2008, we launched our new eMatrix treatment system, a portable touch-screen
device that allows physicians to program dermatological procedures requiring skin
resurfacing. The eMatrix utilizes our Matrix RF technology for fractional tissue heating
to provide ablation and effective resurfacing. With the SelectPulse feature, our customers
can tune eMatrix to any of three resurfacing programs, customizing the depth
of ablation and degree of skin resurfacing to each patients needs.

We
have received 510(k) clearances from the FDA for all of the professional applications
mentioned above. We sell our products in more than 50 countries through a direct sales
force of approximately 40 employees in North America and more than 50 distributors in
Europe, the Middle East, Asia-Pacific, South Africa and Central and South America. As of
December 31, 2008, we had an installed base of over 11,700 products.

# The Syneron Solution

Our
ELOS technology combines electrical and optical energy, each of which has unique
characteristics when used alone and, which, when used together, produce beneficial
synergistic effects. We believe that our ELOS technology represents a paradigm shift in
non-invasive aesthetic medicine because it is the first approach that combines conducted
radiofrequency energy, an electrical energy, and light or laser-based energy, an optical
energy. Most previously available technologies have relied solely on optical energy
sources or solely on radiofrequency energy.

Optical
energy is absorbed in chromophores that may be blood or melanin in, for example, hair
follicles and skin pigments. Water is a chromophore as well, depending on the optical
energy wavelength used. Light has a typical depth of penetration of approximately 0.5 to
2.0 millimeters. Epidermal pigmentation may limit the amount of optical energy that can be
used without burning or damaging the skin. Radiofrequency, or RF, energy differs from
optical energy because it is not absorbed by the chromophore. Our products use two
electrodes to deliver RF energy, or bipolar RF energy. The distance between the two
electrodes controls the depth of penetration of the bipolar RF energy. In our products, we
have selected the distance between the two electrodes to enable a depth of penetration of
the bipolar RF energy of up to approximately 5.0 millimeters in facial applications and
hair removal and up to approximately 25 millimeters in body contouring and cellulite
applications, which permits the treatment of a broad range of dermal and subdermal
aesthetic problems. Our products also contain a mechanism which simultaneously cools the
skins surface and decreases the skins conductivity, pushing the RF energy even
deeper into the skin. The use of RF energy enables real-time measurement of skin
impedance, which allows our products to provide real-time feedback for every pulse,
improving control of skin temperature and enhancing safety.

When
used together, RF and optical energy produce a unique synergistic effect. Optical energy
is used first to heat the target and decrease its resistance to RF energy. The RF energy
is attracted to the areas that have been preheated by the optical energy, which results in
more selective heating of the target. Heating a target structure will require less total
energy with RF and optical energy combined than with optical energy alone. Using less
total energy translates into enhanced safety, decreases the risk of burning the skin and
allows the treatment of darker skin.

Our
ELOS technology is embedded in most of our aesthetic product platforms, which consist of
multiple hand pieces and a console that incorporates the RF and optical energy sources,
sophisticated software and a simple, user-friendly interface. The key benefits of our
technology to our customers include: enhanced control of treatment depth and selectivity
for enhanced safety and increased patient comfort, and continuous temperature measurement
and automated parameter adjustment to reduce the risk of burns.

19

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# Our Products

Our
products address a wide range of treatment alternatives, as summarized in the table below.

|Product
Platform | Applications(1)               | Intended Users     | Energy Sources     | Market Introduction               
|---------------- | ----------------------------- | ------------------ | ------------------ | ----------------------------------
|
|
|
|
|Aurora           | Hair Removal,                 | Physicians         | Light + RF         | U.S.: Third Quarter 2002          
|                 | Improving the skin's          |                    |                    | Rest of World: Fourth Quarter 2001
|                 | appearance(2), Acne treatment |                    |                    |                                   
|                
|Pitanga          | Hair Removal,                 | Aestheticians      | Light + RF         | Rest of World: Fourth Quarter 2003
|                 | Acne treatment                | Medical Spas       |                    |                                   
|                
|Polaris          | Wrinkles reduction,           | Physicians         | Laser + RF         | U.S.: Fourth Quarter 2003         
|                 | Leg Veins treatment,          |                    |                    | Rest of World: Second Quarter 2003
|                 | Other Vascular Lesions        |                    |                    |                                   
|                 | treatment                     |                    |                    |                                   
|                
|Galaxy           | Hair Removal, Improving the   | Physicians         | Light + RF / Laser | U.S.: Second Quarter 2004         
|                 | skin's appearance(2), Acne    |                    | + RF               | Rest of World: Second Quarter 2004
|                 | treatment,                    |                    |                    |                                   
|                 | Wrinkles reduction,           |                    |                    |                                   
|                 | Leg Veins treatment,          |                    |                    |                                   
|                 | Other Vascular Lesions        |                    |                    |                                   
|                 | treatment                     |                    |                    |                                   
|                
|Comet            | Hair Removal                  | Physicians         | Laser + RF         | U.S.: Fourth Quarter 2004         
|                 |                               | Aestheticians      |                    | Rest of World: Fourth Quarter 2004
|                
|VelaSmooth       | Appearance of Cellulite,      | Physicians         | Light + RF+ Vacuum | U.S.: Second Quarter 2005         
|                 | Thigh circumference           | Aestheticians      | + Massage          | Rest of World: First Quarter 2005 
|                 | reduction (in 2007), Body     | Medical Spas       |                    |                                   
|                 | contouring                    |                    |                    |                                   
|                
|eStyle           | Hair Removal, Improving the   | Aestheticians Spas | Light + RF         | Rest of World: First quarter 2006 
|                 | skin appearance,              |                    |                    |                                   
|                 | Acne treatment ,Wrinkles      |                    |                    |                                   
|                 | reduction (ST)                |                    |                    |                                   
|                
|eLight           | Hair Removal, Improving the   | Physicians         | Light + RF         | U.S.: First quarter 2006          
|                 | skin's appearance(2), Acne    |                    |                    | Rest of World: First quarter 2006 
|                 | treatment, Wrinkles           |                    |                    |                                   
|                 | reduction(ST)                 |                    |                    |                                   
|                
|eLaser           | Wrinkles treatment, Leg       | Physicians         | Laser + RF         | U.S.: First quarter 2006          
|                 | Veins treatment, Other        |                    |                    | Rest of World: First quarter 2006 
|                 | Vascular Lesions treatment;   |                    |                    |                                   
|                 | Hair removal                  |                    |                    |                                   
|                 |                               |                    |                    |                                   
|eMax             | Hair Removal, Improving the   | Physicians         | Light + RF / Laser | U.S.: First quarter 2006          
|                 | skin's appearance(2), Acne    |                    | + RF               | Rest of World: First quarter 2006 
|                 | treatment, Wrinkles           |                    |                    |                                   
|                 | reduction, Leg Veins          |                    |                    |                                   
|                 | treatment, Other Vascular     |                    |                    |                                   
|                 | Lesions treatment, and        |                    |                    |                                   
|                 | wrinkles with the ST          |                    |                    |                                   
|                 | applicator                    |                    |                    |                                   

20

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|Product
Platform | Applications(1)             | Intended Users | Energy Sources     | Market Introduction              
|---------------- | --------------------------- | -------------- | ------------------ | ---------------------------------
|
|VelaShape        | Appearance of Cellulite,    | Physicians     | Light + RF+ Vacuum | U.S.:Third Quarter 2007          
|                 | Reduction of thigh          | Aestheticians  | + Massage          | Rest of World: Third quarter 2007
|                 | circumference               | Medical Spas   |                    |                                  
|                
|LipoLite         | Laser-assisted lipolysis    | Physicians     | Laser              | U.S.: Third Quarter 2008         
|                
|eMatrix          | Ablation and resurfacing of | Physicians     | RF                 | U.S.: Fourth Quarter 2008        
|                 | the skin                    |                |                    | Rest of World: Forth quarter 2008
|                
|LiteTouch        | Dental Laser                | Dentists       |                    | U.S.: First quarter 2007         
|                 |                             |                |                    | Rest of World: First quarter 2007

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

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

# Sales and Marketing

We
market our products to dermatologists, plastic surgeons and other cosmetic physicians in
North America and medical and non-medical practitioners outside North America. In North
America, we 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 focus on additional aestheticians throughout the
world. We believe our products represent a significant opportunity for practitioners to
deliver improved patient treatment results and significantly increase their ability to
generate additional revenue.

We
sell our products in 50 countries around the world primarily through a combination of more
than 50 distributors as well as salespeople employed by our distributors throughout the
world. In the United States and Canada, we sell, market and distribute our products
through a direct sales force of approximately 40 individuals. Our U.S. and Canadian sales
efforts are headquartered in Irvine, California, and we manage several separate
territories in the United Stated and Canada. In addition, we have agreements with
distributors to market and sell our products throughout Europe, the Middle East, South
Africa, the Asia-Pacific region and South and Central America.

Our
customer support strategy in North America is to offer our customers Continuing Medical
Education (CME) accredited offsite training courses such as our advanced
fotofacial workshop for physicians and office staff. We also strive to provide our
customers with a predictable cost of ownership, including minimal ongoing maintenance. In
North America, we offer a three-year, parts and services warranty that covers disposable
applicator parts and regular system maintenance. The small size and weight of our system
enables us to complement our warranty programs with a product maintenance program that
offers next-day delivery of replacement products in North America in the case of any
problems with the machine. This unique overnight delivery program eliminates unnecessary
downtime at the users office and results in minimal loss of revenue for our
customers.

# Revenues by Geographic
Market

|Region        | Year ended December 31,
|------------- | -----------------------
|
|
|
|
|North America |                        
|Europe        |                        
|Asia-Pacific  |                        
|Israel        |                        
|Others        |                        
|Total         |                        

21

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# Manufacturing

We
use outsourced manufacturing to produce our devices while maintaining full control over
every step of the production process. We believe that outsourcing allows us to carry low
inventory levels and maintain fixed unit costs 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 regulations. We conduct in-house prototype development and present detailed
manufacturing documents to our subcontractors, who then purchase most of the necessary
components and manufacture the product. These manufacturing subcontractors provide us
fully assembled, or turn-key, services. We control and monitor the
quality of our products by testing each product at our warehouse and through extensive
involvement in the production process at the facilities of our subcontractors.

The
contracts we have with these manufacturers do not have minimum purchase requirements and
allow us to purchase end products from the manufacturers on a purchase order basis. The
contracts have one-year terms that automatically renew for successive one-year terms.
Either we or the manufacturer may terminate the contract by giving the other party four
months written notice prior to the expiration of the term. The time required to
qualify new subcontract manufacturers for our products could cause delays in our ability
to provide products to our customers.

We
procure the diode laser component of our products on behalf of our third-party
manufacturers from a limited number of suppliers. We have flexibility to adjust the number
of diode lasers we procure as well as the delivery schedules. The forecasts we use are
based on historical demands and future plans. Lead times may vary significantly depending
on the size of the order, time required to fabricate and test the components, specific
supplier requirements and current market demand for the components. We reduce the
potential for delays of supply by maintaining relationships with multiple suppliers of
diode lasers. The time required to qualify new suppliers for the diode laser components,
or to redesign them, could cause delays in our manufacturing. To date, we have not
experienced significant delays in obtaining our diode laser components.

# Research and Development

Our
research and development activities are conducted internally by a research and development
staff consisting of 63 employees. Our research and development efforts are focused on the
development of new products, as well as the extension of our existing products to new
applications in the aesthetic medical market. We intend to develop products and product
line extensions that leverage our existing ELOS platform as well as other product
platforms. We have a number of new projects and products under development, mainly
focusing on additional non-invasive aesthetic treatments. We expect to develop several
major product initiatives in 2009: a new product for circumferential reduction, a new
product line for aestheticians and the cosmetic market; and products for home use using
Synerons proprietary ELOS technology.

Until
2007, our research and development efforts have been focused on the development of
products that leverage our existing ELOS platform rather than developing new technologies.
In 2007, our research and development efforts focused in the development of technologies,
which are not based on our existing ELOS platform. Our gross research and development
expenditures were $5.0 million in 2005, $8.5 million in 2006, $12.5 million in 2007, and
$13.8 million in 2008. We estimate our gross research and development expenditures for
2009 will be $10 million.

# Intellectual Property

We
rely on a combination of patent, copyright, trademark and trade secret laws and
confidentiality and invention assignment agreements to protect our intellectual property
rights. As of February 15, 2009, our patent portfolio consisted of 8 issued U.S. patents,
one of which we purchased in December 2004 (with the certain U.S. and international family
members), and 33 patent applications pending in the United States (with an additional 31
applications pending internationally and 10 international patents), related to 40 patent
families relating to our technology and products. One of our patents relates to treating
the skin by deforming it, applying RF energy to it, and massaging it. This patent was
issued in December 2003, and it will remain in force until March 2022, subject to payment
of maintenance fees. Our second patent, which relates to skin treatments using a
combination of RF and optical energy, covers our ELOS technology. This patent will remain
in force until October 2020, subject to payment of maintenance fees. Our third patent,
acquired in December 2004, covers, among other things, methods for the controlled
contraction of collagen using RF energy. It will remain in force until May 2014, subject
to payment of maintenance fees. Our fourth patent, which was issued in May 2005, is
directed to systems and methods for treating the skin using RF energy. This patent will
remain in force until November 2021, subject to payment of maintenance fees. Our fifth
patent is directed to systems and methods for treating the skin with electromagnetic
radiation, in which an electrical response of the skin to an applied voltage is measured,
and a parameter of the radiation is adjusted based on the measurement. This patent issued
in September 2005, and, subject to the payment of maintenance fees, will remain in force
until August 2021. Our sixth patent, which was issued in May 2006, is directed to 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. Our seventh patent,
which was issued in July 2007, is directed for multi directional application of light to
treatment area. This patent will remain in force until January 2024, subject to payment of
maintenance fees. During 2006, we purchased a patent family from PolyOptics Ltd., (and the
inventor, Henry Israel) which included a pending US application and a PCT application.
This patent will remain in force until 2012.

22

---

---

We
expect to file future patent applications in the United States. We have also filed, or
intend to file, foreign counterpart applications in Europe, certain countries in South
America, Canada, Israel, Australia, Peoples Republic of China, Korea, Japan, and
certain other countries in Asia for at least certain applications. We intend to file for
additional patents to strengthen our intellectual property rights. Our trademarks include
Syneron, the Syneron logo, ELOS, Active Dermal Monitoring, Aurora, Polaris, Pitanga,
VelaSmooth, Syner-Cool, Galaxy, Comet, eLight, eLaser, eMax, Elure, Refirme, VelaShape and
LipoLite. All other trademarks, trade names and service marks appearing in this Annual
Report on Form 20-F are the property of their respective owners. We have a policy of
seeking to register our trademarks in the United States, Canada and certain other
countries.

On
October 9, 2007, we reached an agreement with Shaldot and Qray which settled a patent
related claim. Pursuant to this settlement, we entered into a license agreement with
Shaldot and Qray under which we received a license to use and utilize the patent in suit
in any of our products. In return, we agreed to pay Qray a one-time license fee of $0.1
million. We also entered into a share purchase agreement with Shaldot and Qray under which
we invested $1.05 million in Qray in consideration for shares equivalent to 9% of
Qrays outstanding share capital. If Qray meets certain milestones within three and a
half years from the closing of the transaction, we are obligated to invest an additional
$0.45 million in Qray. The costs in connection with our settlement amounted to
approximately $0.2 million.

On
March 10, 2009 our subsidiary, Syneron Inc. was served with a complaint from Palomar
Medical Technologies, Inc. The complaint alleges infringement of US Patents Nos. 5,735,844
and 5,595,568 by hair removal products sold in the United States. These patents are each
currently being reexamined by the U.S. Patent and Trademark Office based on different
prior art. Syneron Inc.s response to the complaint is due May 10, 2009.

All
professional employees and technical consultants are required to execute confidentiality
agreements in connection with their employment and consulting relationships with us. In
most cases, we also require them to agree to disclose and assign to us all inventions
conceived in connection with their services to us. However, there can be no assurance that
these confidentiality and assignment agreements will be enforceable or that they will
provide us with adequate protection.

# Competition

Our
industry is subject to intense competition. We compete against products offered by public
companies, including Candela Corporation, Thermage Inc., Cutera Inc., Cynosure Inc. and
Palomar Medical Technologies Inc., as well as by private companies such as Sciton Inc.,
Reliant Technologies Inc., Lumenis Ltd., Alma Lasers Ltd. and several other smaller
specialized companies. Our products compete against conventional non-light-based
treatments, including Botox and collagen injections, sclerotherapy, electrolysis,
liposuction, chemical peels and microdermabrasion. Our products also compete against laser
and other light-based products.

Competition
among providers of laser and other light-based products for the aesthetic medical market
is characterized by extensive research efforts and rapid technological progress. While we
attempt to protect our products through patents and other intellectual property rights,
there are few barriers of entry that would prevent new entrants or existing competitors
from developing products that would compete directly with ours. There are many companies,
both public and private, that are developing innovative devices that use laser,
light-based and alternative technologies. Many of these competitors have significantly
greater financial and human resources than we do and have established reputations, as well
as worldwide distribution channels that are more effective than ours. Additional
competitors may enter the market and we are likely to compete with new companies in the
future. To compete effectively, we have to demonstrate that our products are attractive
alternatives to other devices and treatments by differentiating our products on the basis
of performance, brand name, reputation and price. We have encountered and expect to
continue to encounter potential customers who, due to existing relationships with our
competitors, are committed to, or prefer the products offered by, these competitors. We
expect that competitive pressures may over time result in price reductions and reduced
margins for our products.

# Government Regulation

Our
products are medical devices subject to extensive and rigorous regulation by the U.S. Food
and Drug Administration, as well as other regulatory bodies, to help ensure that medical
products are safe and effective for their intended uses. FDA regulations govern the
following activities that we perform and will continue to perform:

| |  | product
design and development;
| | - | -------------------------------

| |  | product
testing;
| | - | ----------------

| |  | software
validation;
| | - | --------------------

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

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

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

23

---

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

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

| |  | pre-market
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 or
has Letter to File documentation for the uses for which they are being marketed.

FDAs
Pre-market Clearance and Approval Requirements. Unless an exemption applies, each
medical device we wish to commercially distribute in the United States will require either
prior 510(k) clearance or pre-market approval (PMA) from the FDA. The FDA
classifies medical devices into one of three classes. Devices deemed to pose lower risks
are placed in either class I or II, which requires the manufacturer to submit to the FDA a
registration or a pre-market notification requesting permission to commercially distribute
the device. This process is generally known as 510(k) clearance. Some low risk devices are
exempt from this requirement. Devices deemed by the FDA to pose the greatest risk, such as
life-sustaining, life-supporting or implantable devices, or devices deemed not
substantially equivalent to a previously cleared 510(k) device, are placed in class III,
requiring PMA. All of our current products that are being marketed in the United States
are class II devices.

510(k)
          Clearance Pathway. When a 510(k) clearance is required, we must submit a
          pre-market notification demonstrating that our proposed device is substantially
          equivalent to a previously cleared 510(k) device or a device that was in
          commercial distribution before May 28, 1976 for which the FDA has not yet
called           for the submission of PMA applications. By regulation, the FDA is
required to           clear, negotiate or deny a 510(k) pre-market notification within 90
days of           submission of the application. As a practical matter, clearance often
takes           significantly longer. The FDA may require further information, including
          clinical data, to make a determination regarding substantial equivalence.

Laser
devices used for aesthetic procedures, such as hair removal, have generally qualified for
clearance under 510(k) procedures. We received FDA clearances to market our Aurora
platform of products for hair removal in July 2002 and for superficial vascular and
pigmented lesions in October 2002. We received FDA clearance for the treatment of acne
with the Aurora and the Pitanga products in February 2004. We received FDA clearances to
market our Polaris product platform for leg vein treatment as well as other types of
vascular lesions in April 2003. We received FDA clearance for wrinkle treatment with the
Polaris products in December 2003. In June 2005, the FDA granted 510(k) clearance to our
Vela platform for the temporary reduction in the appearance of cellulite and for the
relief of minor muscle aches, pain and spasms, as well as the temporary improvement of
local blood circulation. In July 2007, the FDA granted 510(k) clearance to our VelaSmooth
product for temporary reduction of thigh circumferences, and in August 2007, the FDA
granted 510(k) clearance to our VelaShape for all uses of our VelaSmooth product. In May
2008, the FDA granted 510(k) to our new LipoLite product for laser-assisted lipolysis and
additional dermatological procedures. In September 2008, the FDA granted 510(k) clearance
to our Matrix RF applicator for use in dermatological procedures requiring ablation and
resurfacing of the skin.

Pre-market
Approval Pathway. PMA application must be submitted to the FDA if the device cannot be
cleared through the 510(k) process or through registration. A PMA application must be
supported by extensive data, including, but not limited to, technical, preclinical,
clinical trials, manufacturing and labeling to demonstrate to the FDAs satisfaction
the safety and effectiveness of the device.

Pervasive
and Continuing Regulation. After a device is placed on the market, numerous regulatory
requirements apply. These include:

| |  | quality
system regulations, or QSR, which require manufacturers, including third-party
manufacturers, to follow stringent design, testing, control, documentation and other
quality assurance procedures during all aspects of the manufacturing process (including
an annual laser report);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | labeling
regulations and FDA prohibitions against the promotion of products for uncleared,
                  unapproved or "off-label" uses;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| |  | medical
device reporting regulations, which require that manufacturers report to the FDA if their
device may have caused or contributed to a death or serious injury or malfunctioned in a
way that would likely cause or contribute to a death or serious injury if the malfunction
were to recur; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24

---

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| |  | post-market
surveillance regulations, which apply when necessary to protect the public health or to
provide additional safety and effectiveness data for the device.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced
inspections by the FDA to determine our compliance with the QSR and other regulations, and
these inspections may include the manufacturing facilities of our manufacturing
subcontractors.

We
also are regulated under the Radiation Control for Health and Safety Act, which requires
laser products to comply with performance standards, including design and operation
requirements, and manufacturers to certify in product labeling and in reports to the FDA
that their products comply with all such standards. The law also requires laser
manufacturers to file new product and annual reports, maintain manufacturing, testing and
sales records, and report product defects. Various warning labels must be affixed and
certain protective devices installed, depending on the class of the product.

Failure
to comply with applicable regulatory requirements can result in enforcement action by the
FDA, which may include any of the following sanctions:

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

| |  | recall
or seizure of our products;
| | - | ----------------------------------

| |  | issuing
an import alert to block entry of products the FDA has reason to believe violate
                  applicable regulatory requirements;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

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

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

| |  | withdrawing
510(k) clearance or pre-market approvals that are already granted; and
| | - | ----------------------------------------------------------------------------------

| |  | criminal
prosecution.
| | - | ---------------------

The
FDA also has the authority to require us to repair, replace or refund the cost of any
medical device that we have manufactured or distributed. If any of these events were to
occur, they could have a material adverse effect on our business.

We
also are subject to a wide range of federal, state and local laws and regulations,
including those related to the environment, health and safety, land use and quality
assurance. We believe that we are in compliance with these laws and regulations as
currently in effect, and our compliance with such laws will not have a material adverse
effect on our capital expenditures, earnings and competitive and financial position.

International
Regulations. International sales of medical devices are subject to foreign
governmental regulations, which vary substantially from country to country. The time
required to obtain clearance or approval by a foreign country may be longer or shorter
than that required for FDA clearance or approval, and the requirements may be different.

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
27 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 (a CE Mark),
indicating that the device conforms with the essential requirements of the applicable
directives and, accordingly, can be commercially distributed throughout the member states
of the European Union, the member states of the European Free Trade Association and
countries which have entered into a Mutual Recognition Agreement. The method of assessing
conformity varies depending on the type and class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment by a
Notified Body, an independent and neutral institution appointed by a country to conduct
the conformity assessment. This third-party assessment may consist of an audit of the
manufacturers quality system and specific testing of the manufacturers device.
An assessment by a Notified Body in one member state of the European Union, the European
Free Trade Association or one country which has entered into a Mutual Recognition
Agreement is required in order for a manufacturer to commercially distribute the product
throughout these countries. In the second quarter of 2003, we received certification for
ISO 13485:2003. An ISO 13845:2003 certificate reflects the voluntary adoption of
harmonized standards; however, compliance with such standards establishes a presumption of
conformity with the essential requirements for a CE Mark. In the third quarter of 2001,
our facility was granted a CE Mark approval certification. The ISO 13485:2003 and the CE
Mark approval are valid until 2010.

25

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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 six active subsidiaries as follows:

| |  | Syneron
GmbH., which is a wholly-owned subsidiary of ours and was established in Germany in
                  August 2001 to market and sell our products in Europe.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Syneron
Inc. and Syneron Canada Corp., which are wholly-owned subsidiaries and were
                  established in 2002 in Delaware and Toronto, Canada, respectively, to
market and                   sell our products in North America.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Syneron
Medical (HK) Ltd., which is a wholly-owned subsidiary and was established in Hong Kong in
June 2004 and became active promoting, marketing and serving as an agent of the Company
in Asia and Australia since January 2007.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Light
Instruments Ltd., which is a wholly-owned subsidiary of ours as of October 2008.
| | - | --------------------------------------------------------------------------------------

| |  | Inlight
Corp., which is a wholly owned subsidiary of ours as of November 4, 2008.
| | - | ---------------------------------------------------------------------------------

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

We
lease our main office and research and development facilities, located in the Industrial
Zone in Yokneam Illit, Israel pursuant to a lease that expires in December 2010. We have
an option to extend our lease for an additional two year period. We, and our subsidiary
Light Instruments Ltd. occupy approximately 36,600 square foot in this leased facility in
Yokneam Illit. Our German subsidiary leases a 8,350 square foot facility in Germany
pursuant to a lease renewable on a yearly basis. Our U.S. subsidiary leases a 2,212 square
foot facility in Schaumburg, Illinois pursuant to a lease that expires in May 2010. Our
U.S. subsidiary also leases a 15,204 square foot facility in Irvine, California pursuant
to a lease that expires in October 2011. Our Canadian subsidiary leases a 14,257 square
foot facility in Richmond Hill, Ontario, Canada pursuant to leases that expire in July
2012. Our Hong-Kong subsidiary leases a 2,814 square foot facility in Hong-Kong pursuant
to a lease that expires in June 2010. Inlight Corp. leases a 840 square foot facility in
Irvine, California, pursuant to a lease which is renewable on a monthly basis. We believe
that our properties are adequate to meet our current needs.

|ITEM 4A. |  | UNRESOLVED STAFF COMMENTS
|-------- |  | -------------------------

None

26

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|ITEM 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- |  | --------------------------------------------

The
following discussion of our financial condition and results of operations should be read
in conjunction with Item 3.A, Key Information  Selected Financial Data
and our consolidated financial statements and the related notes to those statements
included elsewhere in this Annual Report on Form 20-F. In addition to historical
consolidated financial information, the following discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions. Our actual
results and timing of selected events may differ materially from those anticipated in
theses forward-looking statements as a result of many factors, including those discussed
under Item 3.D, Key Information  Risk Factors and elsewhere in this
Annual Report on Form 20-F.

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

# Overview

We
design, develop and market innovative aesthetic medical products mostly based on our
proprietary ELOS technology, which uses the synergy between electrical energy and optical
energy to provide effective, safe and affordable aesthetic medical treatments. Our
products, which we sell primarily to physicians and other practitioners, target a wide
array of non-invasive aesthetic medical procedures, including hair removal, wrinkle
reduction, rejuvenation of the skins appearance through the treatment of superficial
benign vascular and pigmented lesions, and treatment for the temporary reduction in the
appearance of cellulite thigh circumference and skin tightening, and one minimally
invasive product for laser-assisted lipolysis. We believe ELOS provides performance
advantages over existing technologies that rely solely on optical energy. We believe using
optical energy alone limits the safety and efficacy of many aesthetic medical procedures
due to limited skin penetration and unwanted epidermal absorption, and that our
proprietary ELOS technology, which combines optical and electrical energy, enhances the
users ability to accurately target the tissue to be treated and enables real-time
measurement of skin temperature, resulting in increased patient safety and comfort and
improved treatment results.

We
were incorporated in the State of Israel 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.

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
July 2005, we entered into an agreement to invest $1.5 million in Light Instruments Ltd.
in consideration for approximately 51% of Light Instruments outstanding share
capital. As part of the investment agreement, we received the exclusive North American
marketing and sales rights for 10 years following the FDA clearance of Light Instruments
product used for the treatment of oral soft and hard tissue. On July 2, 2007, we entered
into a share purchase agreement to purchase approximately 44% of Light Instruments
outstanding share capital in consideration for an aggregate amount of up to $4.5 million.
In October 2008, we purchased an additional 5% of Light Instruments outstanding
share capital, and we currently own 100% of Light Instruments.

As
of February 15, our North American Sales force consists of 40 salespeople in five
territories, each with a dedicated regional manager.

Also,
in the first quarter of 2006, we launched three new platforms to address medical aesthetic
applications based on our ELOS (Electro-Optical Synergy) combined energy technology.
The new eLight platform combines broad spectrum light with bi-polar radio frequency.
The system provides a full facial solution for skin rejuvenation, including the treatment
of superficial vascular and pigmented lesions, and acne applications. It also supports
hair removal applications. The system also includes a new skin tightening modality 
the ST, which received FDA clearance in March 2006. The new eLaser platform combines
diode laser technology with bi-polar radio frequency and offers ultra fast hair removal,
as well as upgradeability to Synerons leg vein and wrinkle reduction treatments.
Finally, the new eMax platform combines bi-polar radio frequency with multiple forms
of light energy and diode laser energy to deliver the complete range of Synerons
ELOS modalities in one multi-platform system. All the applications on the eLight, eLaser
and eMax have received 510(k) clearance from the FDA.

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

27

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On
April 10, 2007, we entered into an agreement with Fluorinex Active Ltd., an Israeli-based
start-up that develops advanced fluoridation and tooth whitening devices for dentists and
consumers, under which we purchased 38.47% of Fluorinexs then outstanding share
capital in consideration for $1.5 million and received a warrant to purchase an additional
3.85% of Fluorinexs then outstanding share capital. Fluorinex has developed a unique
device that delivers fluoride ions directly to the tooth enamel via a sophisticated
electro-chemical technique. The Fluorinex technology delivers the maximum amount of
fluoride ions to the tooth, for the longest endurance of time known today. Unlike other
electro-chemical based fluoride systems, no electric current passes through the
patients tissue, thus enhancing the safety of the device.

In
the second quarter of 2007, we introduced a new Matrix IR applicator for use with our eMax
and eLaser platforms. The Matrix IR combines fractional optical energy with radio
frequency for deep dermal heating for effective treatment of wrinkles. The collagen
remodeling caused by the Matrix IR treatment is designed for maximum effective penetration
for consistent and effective treatment for wrinkles. We are now permitted to sell the
Matrix IR all over the world.

In
August 2007, our Vela platform received FDA 510(k) pre-market clearance in the
United States and CE Mark certification in the European Union for the temporary reduction
of body circumference.

On
November 8, 2007, we announced our first share repurchase program. Under this share
repurchase program, we have repurchased, and may continue to repurchase, our outstanding
ordinary shares up to an aggregate amount of $50.0 million. Through February 15, 2009, we
repurchased 588,000 ordinary shares at a total price of $9.1 million under this share
repurchase program.

In
the first quarter of 2008, we completed development of our new Matrix RF applicator.
The Matrix RF applicator utilizes our fractional radio frequency technology to provide
fractional tissue heating at three ablation relative ratios, resulting in effective
ablation and resurfacing of the skin. The tunable applicator, equipped with our
SelecPulse, allows the user to adjust the relative ratio of ablation, as well as
direct heating, and to vary the treatment depth based upon desired clinical endpoints. The
Matrix RF applicator is the first bi-polar non-laser and non-light-based aesthetic device
capable of creating a tunable ablation impact, simulating the effects of different types
of ablative / coagulative lasers used for a range of aesthetic applications. These
applications include tightening and resurfacing with minimal or no downtime. Matrix RF is
being sold as an applicator add-on to all existing eLight, eLaser and eMax platforms. The
ergonomically designed headpiece will greatly increase ease-of-use for
physicians performing the treatments. The Matrix RF features a single-use disposable
treatment tip. Each applicator comes with 10 treatments tips at purchase. Treatment will
most often be performed around the eyes, mouth, and cheek, but can also be performed on
the entire face as well as other anatomical areas. The Matrix RF was the second product in
our series of ELOS fractional treatments, which currently includes the Matrix IR
applicator. In September 2008, our Matrix RF applicator received CE Mark certification in
the European Union and FDA clearance in the United States for use in dermatologic
procedures for wrinkle reduction by means of skin ablation and coagulation (CE) and use in
dermatological procedures requiring ablation and resurfacing of the skin (FDA). In the
third quarter of 2008, we commenced selling our Matrix RF applicator.

In
the first quarter of 2008, we also completed the development of our new LipoLite platform.
Our LipoLite is a minimally invasive alternative and a complement to traditional
liposuction fat-removing procedures. The procedure requires only local anesthetic and is
designed to provide patients lasting results with little downtime and a high level of
safety. For our customers, the LipoLite product is comfortable to use, upgradable to
support future applications and fits easily on tabletops to save floor space in small
operating rooms. In May 2008, our LipoLite platform received FDA 510(k) clearance in the
United States for laser-assisted lipolysis and additional dermatological procedures. As a
result of this clearance, we are currently permitted to sell our LipoLite platform in the
United States. In the third quarter of 2008, we commenced selling our LipoLite platform in
the United States.

In
February 2008, we entered into an agreement with Rakuto Bio Technologies Ltd. (RBT), an
Israeli-based start-up that develops and advances a whole skin completion whitening
treatment. Under the agreement, Syneron agreed to purchase an aggregate of 31.57% of
RBTs outstanding share capital in consideration for up to US $ 3.0 million, and
received a warrant to purchase an additional 6.32% of RBT outstanding share capital. As of
February 15, 2009, we hold 15.78% of RBTs outstanding share capital. As part of the
agreement, we have exclusive worldwide distribution rights to RBTs currently
developed product.

In
November 2008, we entered into an agreement with Inlight Corp, a San Diego-based
development and research company, under which we purchased 100% of Inlight Corp.s
outstanding share capital. We expect that Inlights innovative technology will enable
us to release unique and highly competitive skin rejuvenation products during the first
half of 2009. Inligh is currently developing a CO2 laser for fractional skin rejuvenation
and we expect to introduce the product in the second quarter of 2009.

In
November 2008, we entered into a joint venture agreement for the formation of Syneron
China. Our partner in Syneron China is EverCare Medical Group, the largest aesthetic
hospital chain in China. Evercare operates cosmetic surgery hospitals throughout the
country and has been our distributor in China for the past two and a half years. Through
this new Chinese subsidiary, we will be able to sell directly to medical and aesthetic
professionals in China, including doctors, hospitals, medi-spas and cosmetic chains.
Syneron China will also provide training and after sales service and support. The first
two offices of Syneron China were opened in Beijing and Guangzhou in August 2008. In
addition, Syneron China intends to establish product demonstration centers in several
areas in China.

28

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In
December 2008, we launched our new eMatrix treatment system, a portable touch-screen
device that allows physicians to program dermatological procedures requiring skin
resurfacing. The eMatrix utilizes our Matrix RF technology for fractional tissue heating
to provide ablation and effective resurfacing. With the SelectPulse feature, our customers
can tune eMatrix to any of three resurfacing programs, customizing the depth
of ablation and degree of skin resurfacing to each patients needs.

# Revenues

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

We
generate our revenues primarily from the sales of our ELOS-based medical aesthetic
equipment as well as other products, which we developed. For the year ended December 31,
2008, our revenues totaled $115 million. From inception through December 31, 2008, we sold
over 11,700 products worldwide. For the year ended December 31, 2008, we derived
approximately 2.3% of our revenue from the recognition of service revenue. We expect
product service revenue to increase over time as our installed base continues to grow.

We
directly sell our products primarily in the United States, Canada, and to a lesser extent,
in China, Hong Kong and Germany, 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, 2008, we derived 48.1% of our revenue from sales of our products
outside North America through a combination of direct and distributor sales. As of
December 31, 2008, we had approximately 40 salespeople in North America and distributors
in more than 50 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, 2007 and 2008:

|              | Percent of Sales
|------------- | ----------------
|
|
|
|
|North America |                 
|Europe        |                 
|Asia-Pacific  |                 
|Israel        |                 
|Others        |                 
|Total         |                 

# Cost of Revenues

Our
cost of revenues consists of the cost of manufacture and assembly of our 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 royalties to third parties, service and warranty expenses, as
well as salaries and personnel-related expenses for our operations management team which
includes subcontractor management, purchasing and quality control. The cost of revenue as
a percentage of revenues increased from 2007 to 2008 due to an increase in sales of
products that are more expensive to manufacture, an increase in the cost of infrastructure
required to run our service operations and an increase in costs in write-offs of
inventory. 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.

29

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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 slightly 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 primarily due to an increase in personnel costs associated with the expansion of
our management functions and support of our overall growth.

# Financial Income, net

Interest
income and other income consists primarily of interest earned on cash, cash equivalents,
deposits and marketable securities, as well as exchange differences resulting from
remeasurement of our foreign currency transactions and balances into U.S. dollars.

# Taxes on Income

Our
facilities in Israel were granted the status of Approved Enterprise and the
status of Benefited Enterprise (The new program under the Law for the
Encouragement of Capital Investments, 1959), both entitling us to a ten-year exemption
from Israeli corporate tax. The Approved Enterprise and Benefited
Enterprise status only allows corporate tax exemptions on profits generated from
such operations but requires regular Israeli corporate tax on income generated from other
sources, such as gains from sales of marketable securities and interest earned on cash,
cash equivalent and marketable securities. We will seek to maintain the Approved
Enterprise and the Benefited Enterprise status by meeting the necessary
conditions with respect to our future capital investment programs thus extending our
Approved Enterprise benefits beyond the first ten years. Our effective tax
rate is directly affected by the relative proportions of domestic and international
revenue and proportions between revenue from Approved and Benefited Enterprises and
revenue from other sources as discussed above. We are also subject to changing tax laws in
multiple jurisdictions in which we operate. For additional description of Israeli Tax
please see Item 10.E, Additional Information  Taxation  Israeli
Taxation.

# Critical Accounting
Policies and Estimates

Our
discussion and analysis of our financial condition and results of our operations is based
upon our audited consolidated financial statements, which have been prepared in accordance
with U.S. GAAP. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets, liabilities, sales and
expenses and related disclosure of contingent assets and liabilities. On a periodic basis,
we evaluate our estimates, including those related to revenue recognition, warranty
reserves, income taxes, litigation and stock-based compensation. We base our estimates on
historical experience, authoritative pronouncements and various other assumptions which we
believe to be reasonable under the circumstances. Actual results could differ from those
estimates. The following is a discussion of our critical accounting policies and the
significant judgments and estimates affecting the application of those policies in our
consolidated financial statements. See Note 2 to our consolidated financial statements
included elsewhere in this Annual Report on Form 20-F.

Marketable
securities. In accordance with SFAS 157, the Company measures marketable securities
and auction rate securities at fair value. Marketable securities are classified within
Level 1 or Level 2. This is because marketable securities are valued using quoted market
prices or alternative pricing sources and models utilizing market observable inputs.
Investments in auction rate securities are classified within Level 3 because they are
valued using valuation techniques. Some of the inputs to these models are unobservable in
the market and are significant. Due to the current economic environment in which there is
a lack of market activity for auction rate securities, the Company has been unable to
obtain quoted prices or market prices for identical assets as of the measurement date
resulting in significant unobservable inputs used in determining the fair value. The
Company with its third party advisor estimated the fair value of these auction rate
securities using the income approach based on the following: (i) the underlying structure
and contractual provisions of each security; (ii) the present value of future principal
and interest payments discounted at rates considered to reflect current market conditions;
and (iii) consideration of the probabilities of default, auction failure, or repurchase at
par for each period. These estimated fair values could change significantly based on
future market conditions, which could result in recognizing other-than-temporary
impairment losses. The actual value at which such securities could actually be sold or
settled with a willing buyer or seller may differ from such estimated fair values
depending on a number of factors including, but not limited to, current and future
economic conditions, the quantity sold or settled, the presence of an active market and
the availability of a willing buyer or seller. Management determines the appropriate
classification of its investments in marketable debt securities at the time of purchase
and re-evaluates such designations as of each balance sheet date. The Companys
management is generally required to classify its investments into one of three investment
categories under U.S. GAAP: trading; held to maturity; or available-for-sale. The
classification of the investment may affect our reported results. For investments
classified as trading, we are required to recognize changes in the fair values into income
for the period reported. For investments classified as held to maturity, we are required
to carry the investment at amortized cost, with only the amortization occurring during the
period recognized into income. Changes in the fair value of investments classified as
available for sale are not recognized to income during the period, but rather are
recognized as a separate component of equity until realized. We classify our investments
as available-for-sale. During 2008, 2007, and 2006, all marketable securities covered by
Statement of Financial Accounting Standard No. 115 Accounting for Certain
Investments in Debt and Equity Securities were designated as available-for-sale.
Accordingly, these securities are stated at fair value, with unrealized gains and losses
reported in accumulated other comprehensive loss, a separate component of
shareholders equity, net of taxes. Realized gains and losses on sales of
investments, and impairment of investments, as determined on a specific identification
basis, are included in the consolidated statement of operations. Interest and amortization
of premium and discount on debt securities are recorded as financial income.

30

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FASB
Staff Position (FSP) No. 115-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investment (FSP 115-1) and SAB
Topic 5M Other Than Temporary Impairment Of Certain Investments In Debt And Equity
Securities provides guidance for determining when an investment is considered
impaired, whether impairment is other-than temporary, and measurement of an impairment
loss. An investment is considered impaired if the fair value of the investment is less
than its carrying amount. The Company considers various factors in determining whether to
recognize an impairment charge, including the Companys intent and ability to hold
the investment for a period of time sufficient to allow for any anticipated recovery in
market value, the length of time and extent to which the fair value has been less than the
cost basis, the credit ratings of the securities and the financial condition and near-term
prospects of the issuers. If, after consideration of all available evidence to evaluate
the realizable value of its investment, impairment is determined to be other than
temporary, then an impairment loss should be recognized equal to the difference between
the investments carrying amount and its fair value.

We
regularly review our investments for factors that may indicate that a decline in the fair
value of an investment below its cost or amortized cost is other than temporary. Some
factors considered in evaluating whether or not a decline in fair value is other than
temporary include:

Our
ability and intent to retain the investment for a period of time sufficient to allow for a
recovery in value; the duration and extent to which the fair value has been less than
cost; and the financial condition of the issuer. Such reviews are inherently uncertain in
that the value of the investment may not fully recover or may decline further in future
periods resulting in realized losses.

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

| |  | There
is persuasive evidence of an arrangement;
| | - | -----------------------------------------------

| |  | delivery
of product has occurred;
| | - | ---------------------------------

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

| |  | collection
is probable.
| | - | -----------------------

Revenue
from product sales to end users in North America usually includes multiple elements within
a single contract. We consider the sale of a product and the service element in the
agreement to be two separate accounting units of the arrangement and defer the fair value
of the service element to the period in which it is earned. Fair value is determined based
on the price charged on a stand alone basis for the service provided, and data available
from which to estimate the volume of services provided during the 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
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. Revenue from some product
sales to end users in North America includes multiple elements within a single contract.
The Companys accounting policy complies with the requirements set forth in EITF
00-21, relating to the separation of multiple deliverables into individual accounting
units with determinable fair values.

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

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Inventory
write-down. As a designer and manufacturer of high technology equipment, we may be
exposed to a number of economic and industry factors that could result in portions of our
inventory becoming either obsolete or in excess of anticipated usage. These factors
include, but are not limited to, technological changes in our markets, our ability to meet
changing customer requirements and competitive pressures in products and prices. Our
policy is to establish inventory reserves when conditions exist that suggest that our
inventory may be in excess of anticipated demand or is obsolete based upon our assumptions
about future demand for our products and market conditions. We regularly evaluate our
ability to realize the value of our inventory based on combination of factors including
the following: historical usage rates, forecasted sales or usage, estimated current and
future values and new product instructions. Assumptions used in determining our estimates
of future product demand may prove to be incorrect, in which case the provision required
for excess and absolute inventory would have to be adjusted in the future. If inventory is
determined to be overvalued, we would be required to recognize such as cost of goods sold
at the time of such determination. When recorded, our reserves are intended to reduce the
carting value of our inventory to its net realizable.

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

In
June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB SFAS No.
109, Accounting for Income Taxes (FIN 48). The Interpretation
addresses the determination of whether tax benefits claimed or expected to be claimed on a
tax return should be recorded in the financial statements. Under FIN 48, we may recognize
the tax benefit from an uncertain tax position only if it is more likely than not that the
tax position will be sustained on examination by the tax authorities, based on the
technical merits of the position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a greater
than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties on income
taxes, accounting in interim periods and requires increased disclosures. The provisions of
FIN 48 are effective beginning January 1, 2007. Based on our evaluations, the FIN 48
impact on our consolidated financial statements is not material.

Stock-Based
Compensation. SFAS 123(R) requires share-based payments to employees, including grants
of employee stock options, to be recognized in the income statement based on their fair
values at the date of grant. Pro forma disclosure is no longer an alternative.

On
January 1, 2006, we adopted SFAS 123(R) using the modified prospective method as permitted
under SFAS 123(R). Under that transition method, compensation cost recognized during 2006
included: (a) compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123, and (b) compensation cost for all
share-based payments granted subsequent to January 1, 2006, based on the grant-date
fair value estimated in accordance with the provisions of SFAS 123(R). In accordance with
the modified prospective method of adoption, our results of operations and financial
position for prior periods have not been restated.

We
used the Black-Scholes option pricing model in 2003 and 2004 and the Binominal model for
options granted thereafter to estimate the fair value of stock option grants. Key
assumptions used to estimate the fair value of stock options include the exercise price of
the award, the expected option term, the expected volatility of our stock over the
options expected term, the risk-free interest rate over the options expected
term, the post-vesting forfeiture rate, the suboptimal exercise factor and our expected
annual dividend yield. Expected volatilities are based on historical volatilities of
similar companies. As equity-based compensation expense recognized in the consolidated
statement of income is based on awards ultimately expected to vest, it should be reduced
for estimated forfeitures. The expected life represents the weighted average period of
time that options granted are expected to be outstanding giving consideration to vesting
schedules and our historical exercise patterns; and the risk-free rate is based on the
U.S. Treasury yield curve in effect at the time of grant for periods corresponding with
the expected life of the option. The post-vesting forfeiture rate and estimated
forfeitures are based on our historical experience and the suboptimal exercise factor is
based on our historical experience as well as on academic papers and the common practice
which support our assumptions. Assumed dividend yield of zero is based on the fact that we
have never paid cash dividends and have no present intention to pay cash dividends.

If
factors change and we employ different assumptions for estimating stock-based compensation
expense in future periods the stock-based compensation expense we recognize in future
periods may differ significantly from what we have recorded in the current period and
could materially affect our operating income, net income and earnings per share. It may
also result in a lack of comparability with other companies that use different models,
methods and assumptions. Existing valuation models, including the Binominal model, may not
provide reliable measures of the fair values of our stock-based compensation.
Consequently, there is a risk that our estimates of the fair values of our stock-based
compensation awards on the grant dates may bear little resemblance to the actual values
realized upon the exercise, expiration, early termination or forfeiture of those
stock-based payments in the future. Certain stock-based payments, such as employee stock
options, may expire with little or no intrinsic value compared to the fair values
originally estimated on the grant date and reported in our financial statements.
Alternatively, the value realized from these instruments may be significantly higher than
the fair values originally estimated on the grant date and reported in our financial
statements.

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Litigation.Management sets aside liabilities related to litigation brought against us
          when the amount of the potential loss is probable and can be estimated. Because
          of the uncertainties related to an unfavorable outcome of litigation, and the
          amount and range of loss on pending litigation, management is often unable to
          make an accurate estimate of the liability that could result from an
unfavorable           outcome. As litigation progresses, we continue to assess our
potential liability           and revise our estimates accordingly. Such revisions in our
estimates could           materially impact our results of operations and financial
position. Estimates of           litigation liability affect our accrued liability line
item in our consolidated           balance sheet and our general and administrative
expense line item in our           statement of income.

Warranty
Reserve. We generally provide a one to three years standard warranty with our
products, depending on the type of product and the country in which we do business. After
the warranty period, maintenance and support is provided on a service contract basis or on
an individual call basis. We provide for the estimated cost of product warranties at the
time product revenue is recognized. Factors that affect our warranty reserves include the
number of units sold, historical and anticipated rates of warranty repairs and the cost
per repair. While we engage in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of our component suppliers, our estimated
warranty obligation is affected by ongoing product failure rates, specific product class
failures outside of our baseline experience, material usage and service delivery costs
incurred in correcting a product failure. If actual product failure rates, material usage
or service delivery costs differ from our estimates, revisions to the estimated warranty
liability would be required. Assumptions and historical warranty experience are evaluated
to determine the appropriateness of such assumptions. We assess the adequacy of the
warranty provision once a year and we may adjust this provision if necessary.

Fair
Market Measurements. The performance of fair value measurements is an integral part of
the preparation of financial statements in accordance with generally accepted accounting
principles. Fair value is defined as the price that would be received to sell the asset or
paid to transfer the liability in an orderly transaction between market participants to
sell or transfer such an asset or liability. Selection of the appropriate valuation
techniques, as well as determination of assumptions, risks and estimates used by market
participants in pricing the asset or liability requires significant judgment. Although we
believe that the inputs used in our evaluations techniques are reasonable, a change in one
or more of the inputs could result in an increase or decrease in the fair value of certain
assets and certain liabilities and could have an impact on both our consolidated balance
sheets and consolidated statements of operations.

# Results of Operations

# Years Ended December 31,
2007 and December 31, 2008

Revenues. Revenues in 2008 decreased by $26 million, or 18.4%, from $141 million in
          2007 to $115 million. The decrease was primarily attributable to the global
          financial crisis, a weakness in US economy as well as in the rest of the world,
          combined with a tightening of credit terms available to our customers.

Cost
of Revenues. The cost of revenues increased by $2.7 million in 2008, from $27.0
million in 2007 to $29.7 million. The increase in cost of revenues was primarily
attributable to a reduction of the average sales price of our products, a one-time
inventory write-off and our overhead expenses which remained fixed while our sales volume
was reduced.

Research
and development. Research and development expenses increased by $1.3 million, from
$12.5 million in 2007 to $13.8 million in 2008. As a percentage of revenues, research and
development expenses increased from 8.9% in 2007 to 12% in 2008. The increase was
primarily attributable to a 14% strengthening of the NIS against the US$. Research and
development expenses for the year ended December 31, 2008 included $0.3 million of
stock-based compensation expenses recorded under SFAS 123(R) in comparison to $0.9 million
of stock-based compensation expenses recorded under SFAS 123(R) for the year ended
December 31, 2007.

Selling
and Marketing Expenses. Selling and marketing expenses decreased by $4.5 million, from
$58.6 million in 2007 to $54.1 million in 2008. As a percentage of revenues, selling and
marketing expenses increased from 41.6% in 2007 to 47% in 2008. The decrease in selling
and marketing expenses was primarily attributable to a reduction of revenue in 2008.
Selling and marketing expenses for the year ended December 31, 2008 included $3.9 million
of stock-based compensation expenses recorded under SFAS 123(R) in comparison to $4.5
million of stock-based compensation expenses recorded under SFAS 123(R) for the year ended
December 31, 2007.

General
and Administrative Expenses. General and administrative expenses increased by $5.8
million, from $11.9 million in 2007 to $17.7 million in 2008. As a percentage of revenues,
general and administrative expenses increased from 8.4% in 2007 to 15.4% in 2008. The
increase in general and administrative expenses was primarily attributable to a provision
for doubtful debts and legal fees. General and administrative expenses for the year ended
December 31, 2008 included $3.4 million of stock-based compensation expenses recorded
under SFAS 123(R) in comparison to $2.1 of stock-based compensation expenses recorded
under SFAS 123(R) for the year ended December 31, 2007.

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Financial
Income. Financial income increased by $0.6 million, from $3.3 million in 2007 to $3.9
million in 2008. The increase in financial income was primarily attributable to interest
earned on our increasing cash balance offset partially by a low interest rate and by an
impairment charge of $5.8 million and $1.6 million on our investment portfolio due to
uncertainties in the capital markets regarding auction-rate securities in the year ended
December 31, 2007 and 2008 respectively. As a percentage of revenues, financial income
increased from 2.3% in 2007 to 3.4% in 2008.

Taxes
on Income. Income taxes decreased by $5 million, from income tax expense in the amount
of $3.0 million in 2007 to income tax benefit in the amount of $2.0 million in 2008. As a
percentage of revenue, taxes on income changed from 2.15% in 2007 to 1.7% in 2008. The
decrease in taxes on income was primarily attributed to a reverse of the prior years
provision resulting from final tax assessment reached with the Israeli tax authorities. As
an Approved Enterprise and a Benefited Enterprise in Israel, we
are exempt from tax on any income derived from our Approved Enterprise and
Benefited Enterprise, and we pay taxes only on income from other sources which
are not integral to our Approved Enterprise and Benefited
Enterprise, such as interest on marketable securities. Our subsidiaries had loss
carryforwards of approximately $34.04 million as of December 31, 2008 as compared to
approximately $38.0 million as of December 31, 2007. We have recorded a valuation
allowance for the deferred taxes on these losses since it is more likely than not that we
will not be able to offset such losses against future income. In addition we have capital
loss for tax purposes on marketable securities resulting from the U.S. dollar/NIS
fluctuation rate. We had loss carry forwards of approximately $38.0 million. The Company
provided a valuation allowance with respect to the above mentioned capital loss to reduce
deferred tax assets to amounts which are more likely than not to be realized during 2009
(see also Note 15d to the consolidated financial statements).

# Years Ended December 31,
2006 and December 31, 2007

Revenues. Revenues in 2007 increased by $24 million, or 20.5%, from $117 million in
          2006 to $141 million. The increase was primarily attributable to increased unit
          sales as a result of continued extensive efforts in Asia, South America, Europe
          and North America which resulted in an increase in the market share of Syneron
          products.

Cost
of Revenues. Cost of revenues increased by $9.1 million in 2007, from $17.9 million in
2006 to $27.0 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 15.3% in 2006 to 19.1% in 2007 due to change in our
geographical product mix.

Research
and development. Research and development expenses increased by $4.0 million, from
$8.5 million in 2006 to $12.5 million in 2007. As a percentage of revenues, research and
development expenses increased from 7.3% in 2006 to 8.9% in 2007. The increase was
primarily attributable to expansion of our research and development staff, its materials,
and the development of new products such as our Matrix RF applicator, VelaShape and
LipoLite. Research and Development expenses for the year ended December 31, 2007 included
$0.9 million of stock-based compensation expenses recorded under SFAS 123(R).

Selling
and Marketing Expenses. Selling and marketing expenses increased by $12.2 million,
from $46.4 million in 2006 to $58.6 million in 2007. As a percentage of revenues, selling
and marketing expenses increased from 39.7% in 2006 to 41.6% in 2007. The increase in
selling and marketing expenses was primarily attributable to an increase in personnel
costs, sales force, and marketing activities associated with the expansion of our
activities in North America, Europe, Asia-Pacific and South America. Selling and Marketing
expenses for the year ended December 31, 2007 included $4.5 million of stock-based
compensation expenses recorded under SFAS 123(R).

General
and Administrative Expenses. General and administrative expenses increased by $2.4
million, from $9.5 million in 2006 to $11.9 million in 2007. As a percentage of revenues,
general and administrative expenses increased from 8.0% in 2006 to 8.4% in 2007. 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. General and Administrative expenses for
the year ended December 31, 2007 included $2.1 million of stock-based compensation
expenses recorded under SFAS 123(R).

Financial
Income. Financial income decreased by $3.2 million, from $6.5 million in 2006 to $3.3
million in 2007. The decrease in financial income was primarily attributable to an
impairment charge of $5.8 million on our investment portfolio due to uncertainties in the
capital markets regarding auction-rate securities in 2007. As a percentage of revenues,
financial income decreased from 5.5% in 2006 to 2.3% in 2007.

Taxes
on Income. Income taxes increased by $1.5 million, from $1.5 million in 2006 to $3.0
million in 2007. As a percentage of revenue, taxes on income increased from 1.3% in 2006
to 2.15% in 2007. 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 $38.0 million in 2007 as compared to approximately $50.0 million in 2006. We
have recorded a valuation allowance for the deferred taxes on these losses since it is
more likely than not that we will not be able to offset such losses against future income.

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

From
December 31, 2002 through August 10, 2004, we funded our operations principally from
private placements of our preferred shares that resulted in aggregate net proceeds of
approximately $3.3 million. On August 11, 2004, we completed our initial public offering,
which resulted in net proceeds of approximately $54.0 million. Since August 10, 2004, we
have been using the proceeds from our initial public offering and our working capital to
fund our operations. On March 8, 2005, certain selling shareholders completed a secondary
offering, in connection with which we received net proceeds of approximately $1.6 million
from the exercise of options. On August 11, 2005, the one-year lock-up period for certain
of our shareholders ended, and following that period, we raised $11.7 million from the
exercise of options. As of February 15, 2009, we did not have any outstanding or available
debt financing arrangements.

As
of December 31, 2008, we had working capital of $205 million, and our primary source of
liquidity was $217 million in cash, cash equivalents and marketable securities and cash
flow from operations. Approximately $9.5 million of the marketable securities that we held
as of December 31, 2008 were auction-rate securities consisting of interests in
collateralized debt obligations supported by pools of residential and commercial mortgages
or credit cards, insurance securitizations and other structured credits, including
corporate bonds. While the auction-rate securities held by us had AAA/Aaa credit ratings
at the time of our purchase of these securities, as part of the recent ongoing credit
market crisis, the auction-rate securities held by us have experienced multiple failed
auctions. As a result, we recorded a pre-tax impairment charge of approximately $5.8
million in the fourth quarter of 2007 and an additional charge of $1.6 million during
2008. We cannot predict when the liquidity of these auction-rate securities will improve.
Please see Item 3.D. Key Information  Risk Factors for further details
regarding our auction-rated securities.

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
$37.3 million in 2006, $47.8 million in 2007, and $20.4 million in 2008. The change in net
cash provided by operating activities reflects a decrease in sales activities. During
2008, trade receivables, other account receivables and prepaid expenses decreased as a
result of a decrease in sales activities. In 2007, we incurred an impairment charge of
$5.8 million on our investment portfolio due to uncertainties in the capital markets
regarding auction-rate securities. In 2008 we increased the impairment charge with
additional $1.6 million.

Net
Cash (Used In) Investing Activities. Net cash provided by (used in) investing
activities was $(34.7) million in 2006, $(17.4) million in 2007 and provided by $10.9
million in 2008. Cash used in investing activities is primarily attributable to marketable
securities. For the year ended December 31, 2006, we invested $1.0 million in capital
expenditures, which consisted primarily of purchases of a patent family, software,
manufacturing equipment and general equipment. For the year ended December 31, 2007, we
invested $8.4 million in capital expenditures, which consisted primarily of an acquisition
of a minority share in a subsidiary ($3.6 million), investment in affiliated companies
($2.6 million), leasehold improvements ($1.3 million), and computers and general equipment
($0.9 million). For the year ended December 31, 2008, we invested $4.1 million in capital
expenditures, which consisted primarily of a purchase of minority shares in our
subsidiaries ($1.3 million), investment in affiliated companies ($1.6 million) and a
purchase of computers and general equipment ($1.2 million).We expect our capital
expenditures in 2009 will be approximately $1 million and will consist of computers and
general equipment.

Net
Cash Provided By (Used In) Financing Activities. Net cash provided by (used in)
financing activities was $0.3 million in 2006, ($3.7) million in 2007 and ($1.3) million
in 2008. Net cash provided by financing activities in 2006 was primarily attributable to
the proceeds of the exercise of stock options and the sale of restricted shares units. Net
cash used in 2007 financing activities was attributed to the proceeds of exercise of
options and the sale of restricted shares units in the amount of $3.5 million. This was
offset by the Companys repurchase program under which we have repurchased our
outstanding ordinary shares in the aggregate amount of in the amount of $7.2 million. Net
cash provided by financing activities in 2008 was primarily attributable to the
companys repurchase program under which we have repurchased our outstanding ordinary
shares in the aggregate amount of $1.9 million, offset by reimbursement of share issuance
expenses ($0.6) million.

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

Our
research and development activities are conducted internally by a research and development
staff consisting of 63 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 have a number of new
projects and products under development, mainly focusing on additional non-invasive
aesthetic treatments. We expect to continue and develop several major product initiatives
in 2009 including a new product for circumferential reduction, a new product line for
aestheticians and the cosmetic market; and products for home use using Synerons
proprietary ELOS technology.

Prior
to 2007, our research and development effort has been focused on the development of
products that leverage our existing ELOS platform rather than developing new technologies.
In 2007 our research and development efforts focused on the development of technologies
that are not only based on our existing ELOS technology. Our gross research and
development expenditures were $8.5 million in 2006, $12.5 million in 2007, and $13.8
million in 2008. We expect to continue to increase our expenditures on research and
development.

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

In
May 2008, the FDA granted 510(k) to our new LipoLite product for laser-assisted lipolysis
and additional dermatological procedures. In September 2008, the FDA granted 510(k)
clearance to our Matrix RF applicator for use in dermatological procedures requiring
ablation and resurfacing of the skin.

We
intend to continue the development of new products and procedures in the medical aesthetic
market in order to maintain the growth in revenue and net income.

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

We
do not have off-balance sheet arrangements (as such term is defined in Item E(2) of Form
20-F) that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial conditions, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are material to
investors.

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

The
following table summarizes our contractual commitments as of December 31, 2008 excluding
royalty payments commitments, such as amounts due to the Israeli Office of Chief
Scientist, and the effect those commitments are expected to have on our liquidity and cash
flow in future periods:

|                            | Payments Due by Period
|--------------------------- | ----------------------
|
|
|
|
|Uncertain tax positions (1) |                       
|Operating leases (2)        |                       

| | (1) | Uncertain
income tax position under FASB Interpretation No. 48,           Accounting for
Uncertainty in Income Taxes, (FIN 48) are           due upon settlement
and we are unable to reasonably estimate the ultimate amount           or timing of
settlement. See Note 14 in our Consolidated Financial Statements           for further
information regarding the Companys liability under FIN 48.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Consists
of operating leases for our facilities and motor vehicles
| | --- | ------------------------------------------------------------------

|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 February 15, 2009:

|Name                | Age |  | Position(s)                                
|------------------- | --- |  | -------------------------------------------
|
|
|
|
|Dr. Shimon Eckhouse | 64  |  | Chairman of the Board of Directors         
|Louis Scafuri       | 57  |  | Chief Executive Officer                    
|Doron Gerstel       | 49  |  | Former Director and Chief Executive Officer
|Fabian Tenenbaum    | 35  |  | Chief Financial Officer                    
|Dr. Michael Anghel  | 70  |  | External Director                          
|Marshall Butler     | 82  |  | Director                                   
|Yaffa Krindel       | 54  |  | Director                                   
|David Schlachet     | 64  |  | Director                                   
|Dan Suesskind       | 65  |  | External Director                          

36

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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., ColorChip Ltd., Ventor Medical Technologies Ltd., Tulip Ltd., and Navotek
          Ltd. Dr. Eckhouse was a co-founder of ColorChip and served as its chairman from
          2003 to January 2004 and again since 2007, and as its chief executive officer
          from 2001 to 2003. Dr. Eckhouse was the chairman and chief executive officer of
          ESC Medical Systems from its inception in 1992 until 1999. Prior to founding ESC
          Medical Systems, Dr. Eckhouse was head of product development and technical
          director at Maxwell Technologies in San Diego, California. Before that, Dr.
          Eckhouse was a scientist, team leader and head of a department in Rafael,
          Armament Development Authority of Israel and was active in various areas of
          research and development, including lasers and electro-optics. Dr. Eckhouse
          holds a B.Sc. in physics from the Technion Israeli Institute of Technology and a
          Ph.D. in physics from the University of California at Irvine. He has more than
          20 registered patents and published more than 50 papers in leading reference
          journals and conferences. He is also a member of the board of directors of the
          Technion Israeli Institute of Technology.

Louis
Scafuri was appointed our Chief Executive Officer on February 2, 2009. From 1983 until
1999, Mr. Scafuri held various executive and sales positions with GE Marquette Medical
Systems. In his last position with GE Marquette Medical Systems, Mr. Scafuri served as its
COO and President. From 1999 to 2001, Mr. Scafuri served as the COO of ESC Medical, where
he was in charge of the global sales, R&D and Operations of the company. From 2002,
Mr. Scafuri acted as an entrepreneur and angel investor in medical device and medical
aesthetic companies in the U.S. Mr. Scafuri holds a B.Sc. degree in biology from Cornell
University in Ithaca, NY.

Doron
Gerstel was appointed our Chief Executive Officer on May 14, 2007 and was elected as a
director of the Company as of December 23, 2008. On February 2, 2009, Mr. Gerstel ceased
to be our Chief Executive Officer and a director of the Company. Previously, Mr. Gerstel
served as our President of Syneron North America since May 2006. Prior to that Mr. Gerstel
was a co-founder of Zend Technologies Inc., a private technology company that creates
modern open source web infrastructure, where he served as President and Chief Executive
Officer from its inception in 1999 until May 2006. Prior to his founding of Zend, Mr.
Gerstel was VP Operation of Lumenis Ltd. (formerly ESC Medical Systems), a public company
that develops, manufacturers and sells laser and light-based devices. Mr. Gerstel holds a
Bachelor of Science in Economics and Information Systems from the Technion, and an M.B.A.
from Tel Aviv University.

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

Dr.
          Michael Anghel has served as a director since November 2004. Until 2005,
Dr.           Anghel served as the President and CEO of Israel Discount Capital Markets
&          Investments Corp., a subsidiary of the Israel Discount Bank. From 2000 to
2004,           Dr. Anghel served as the Chief Executive Officer of CAP Ventures, an
operating           venture capital company he founded that has invested and established
a number of           information technology and communications enterprises. Since 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 Evogene           Ltd., Dan Hotels Ltd., Analyst Provident Fund, Partner
Communications Company           Ltd., Straus Group and several other private companies,
including Gravity Visual           Effects & Design 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 is the Chairman
of the Executive Program of the           Graduate School of Business Administration of
Tel Aviv University. Dr. Anghel           received his B.A. in Economics from the Hebrew
University in 1960, an M.B.A. in           Economics and Finance from Columbia University
in 1964, and a Ph.D. in           International Finance from Columbia University in 1969.

Marshall
Butler has served as a director since October 2003. Mr. Butler is a co-founder and has
served as chairman of both First Israel Mezzanine Investors Fund and Israeli Infinity
Venture Capital Fund since 1996. Mr. Butler is a director of Pixer Technology Ltd., and
A.R.T. New York. Mr. Butler served as chairman of Nitzanim, AVX/Kyocera Corporation from
1994 to 2001. Mr. Butler served as Chief Executive Officer and chairman of AVX Corporation
from 1974 to 1993 and as director of Kyocera Corporation from 1990 to 1994. Mr.
Butler is on the board of governors of the Technion Institute in Haifa, Israel. In 1998,
Mr. Butler received the Israeli Prime Ministers award for his contribution to
Israeli industry. In 2001, he received an Honoree Doctorate from the Technion Institute.

Yaffa
Krindel has served as a director since November 2005. She is currently serving as a
General Partner in Tamarix Ventures, a private cleantech venture capital partnership
headquartered in Herzliya, Israel. From 1997 until 2007 Ms. Krindel served as Partner and
Managing Partner of Star Ventures, a private venture capital fund headquartered
in Munich, Germany. Before joining Star Ventures, between 1992 and 1996, Ms. Krindel
served as CFO and VP Finance of Lannet Data Communications Ltd., then a publicly traded
company in NASDAQ (now part of Avaya Inc.), a data communication systems company for the
enterprise market. From 1993 to 1997 she served as a director and 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 : Fundtech Ltd.
(NASDAQ: FNDT), Voltaire Ltd. (NASDAQ: VOLT), OrSense Ltd. and Siano Inc. 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.

37

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David
Schlachet served as our Chief Executive Officer from November 2005 until May 14, 2007,
when he resigned as our Chief Executive Officer and was appointed to our board of
directors. From July 2004 to November 2005, Mr. Schlachet served as our Chief Financial
Officer. From 2000 to June 2004, Mr. Schlachet served as Managing Partner of Biocom, a
venture capital fund specializing in the life sciences area. From 1995 to 2000, Mr.
Schlachet served as a senior Vice President and Chief Financial Officer of Strauss Elite
Holdings, a packaged food group. From June 1997 to June 2000 David Schlachet also served
as an active chairman of Elite Industries, a 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 EzChip (formerly LanOptics Ltd.). In addition, Mr. Schlachet serves as a
director for Tel-Aviv Stock Exchange listed companies Taya Investments Ltd., Mazor
Surgical Technologies Ltd. and Adgar Investments and Developments Ltd. As of November
2008, Mr. Schlachet was nominated to serve as a director in the Tel Aviv Stock Exchange
(TASE) and as a director and audit committee member of the TASE Clearing House. Mr.
Schlachet also serves 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 Tel-Aviv
University.

Dan
Suesskind has served as a director since November 2004. Until 2008, Mr. Suesskind has
held numerous positions with Teva Pharmaceutical Industries Ltd. since 1976. Mr. Suesskind
served as Tevas Chief Financial Officer from 1977 until 2008, and as a director from
1981 until 2001. 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 Ness Technologies Inc., 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 serves at the discretion of our board of directors and hold office
until his or her successor is elected or his or her earlier resignation or removal. Each
other executive officer, in his or her capacity as such, serves at the discretion of our
Chief Executive Officer and holds office until his or her successor is elected or his or
her earlier resignation or removal.

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

The
aggregate direct compensation we paid to our directors who are not executive officers for
their services as directors as a group for the year ended December 31, 2008 was
approximately $321,000. This amount includes payment to our Chairman of the board.
Directors are reimbursed for expenses incurred in order to attend board or committee
meetings.

The
aggregate direct compensation we and our subsidiaries paid to the executive officers as a
group for the year ended December 31, 2008 was approximately $2.2 million. 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 2008, other than
reimbursements for travel expenses.

As
of February 15, 2009, our directors and officers (9 persons, including Doron Gerstel, a
former director and chief executive officer of the Company) had outstanding options to
purchase 2,446,060 ordinary shares with exercise prices ranging from $0.01 to $27.73.
13,375 of these options will expire in the year 2011, 4,000 of these option will expire in
the year 2012, 408,249 of these options will expire in the year 2013, 15,000 of these
options will expire in the year 2014, 1,555,436 of these options will expire in the year
2015, and 450,000 will expire in 2016.

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

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

# Board of Directors

The
Sarbanes-Oxley Act of 2002, as well as related new rules subsequently implemented by the
Securities and Exchange Commission and the NASDAQ Global Select Market, requires issuers
to comply with various corporate governance practices. Our board of directors
currently consists of six directors, four of whom are independent, and our audit committee
consists of three directors, all of whom are independent. In addition, Israeli law
requires that we have at least two external directors, as described in greater detail
below.

38

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---

In
general, the number of members of our board of directors will be determined from time to
time by a vote of at least 75% of the ordinary shares present and entitled to vote,
provided that there shall be no more than 7 and no fewer than three directors. Our board
of directors consists of 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, in person or by proxy, at a shareholders
meeting. The directors of only one class are elected at each annual meeting, so that the
regular term of only one class of directors expires annually. At our annual general
meeting held in 2008, the term of the first class expired and Mr. David Schlachet and Mr.
Doron Gerstel were elected for a three-year term. Mr. Doron Gerstel has ceased to serve on
the board in February 2009. At our annual general meeting to be held in 2009, the term of
the second class, consisting of Mr. Butler and Ms. Krindel, will expire, and the directors
elected at that meeting will be elected for a three-year term. At our annual general
meeting to be held in 2010, 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.
After these initial terms, directors (other than the external directors) shall serve in
office until the end of the third annual shareholders meeting following the one in
which they were elected. Any director elected following the removal or resignation of one
of the directors, shall serve until the third annual meeting of the shareholders following
the meeting in which he was elected.

The
external directors will not be assigned a class. The general meeting of our shareholders
may dismiss a director during his or her term of office only by a vote of at least 75% of
the ordinary shares present and entitled to vote (except for external directors, who may
be dismissed only in the manner prescribed in the Companies Law). We have employment and
consultancy agreements with our principal executive officers. These agreements contain
salary, benefit, non-competition and other provisions that we believe to be customary in
our industry. In addition, these agreements provide for up to six months of liquidation
fees in certain events of termination of employment. Agreements with our directors
(serving in that capacity) do not provide for benefits upon termination of service.

Each
of our executive officers serves at the discretion of our board of directors and holds
office until his or her successor is elected or his or her resignation or removal.

# External Directors

We
are subject to the Companies Law. Under the Companies Law, an Israeli company whose shares
have been offered to the public or whose shares are listed for trading on a stock exchange
in or outside of Israel, is required to appoint at least two external directors to serve
on its board of directors. Our external directors are Dr. Anghel and Mr. Suesskind. At
least one of the outside directors is required to have financial and accounting
expertise, unless another member of the audit committee, who is an independent
director under the NASDAQ Marketplace Rules, has financial and accounting
expertise, and the other outside director or directors are required to have
professional expertise. The above qualifications do not apply to external
directors appointed prior to January 19, 2006. However, an external director may not be
appointed to an additional term unless: (i) such director has accounting and
financial expertise; or (ii) he or she has professional expertise, and
on the date of appointment for another term there is another external director who has
accounting and financial expertise and the number of accounting and
financial experts on the board of directors is at least equal to the minimum number
determined appropriate by the board of directors.

A
director has professional expertise if he or she satisfies one of the
following:

| |  | the
director holds an academic degree in one of these areas: economics, business
              administration, accounting, law or public administration;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
director holds an academic degree or has other higher education, all in the main
              business sector of the company or in a relevant area for the board
position; or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
director has at least five years experience in one or more of the following (or a
combined five years experience in at least two or more of these: (a) senior
management position in a corporation of significant business scope; (b) senior public
office or senior position in the public sector; or (c) senior position in the main
business sector of the company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A
director with financial and accounting expertise is a person that due to his
or her education, experience and skills has high skills and understanding of
business-accounting issues and financial reports which allow him to deeply understand the
financial reports of the company and hold a discussion relating to the presentation of
financial information. The companys board of directors will take into consideration
in determining whether a director has accounting and financial expertise,
among other things, his or her education, experience and knowledge in any of the
following:

| |  | accounting
issues and accounting control issues characteristic to the segment in which the
              company operates and to companies of the size and complexity of the company;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
functions of the external auditor and the obligations imposed on such auditor;
| | - | ----------------------------------------------------------------------------------

| |  | preparation
of financial reports and their approval in accordance with the Companies Law
              and the securities law.
| | - | ------------------------------------------------------------------------------------------------------------------------------

39

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A
person may not serve as an external director if at the date of the persons
appointment or within the prior two years the person, or his or her relatives, partners,
employers or entities under the persons control, have or had any affiliation with
us or any entity controlling, controlled by or under common control with us. Under the
Companies Law, affiliation includes:

| |  | an
employment relationship;
| | - | ---------------------------

| |  | a
business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------

| |  | control;
and
| | - | ------------

| |  | service
as an office holder, excluding service as a director in a private company prior to the
first offering of its shares to the public if such director was appointed as a director
of the private company in order to serve as an external director following the initial
public offering.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

An
office holder is defined as any director, managing director, general manager,
chief executive officer, executive vice president, vice president, other manager directly
subordinate to the general manager or any other person assuming the responsibilities of
any of these positions regardless of that persons title. Each person listed in the
table under Item 6A.  Directors and Senior Management is an office
holder.

A
person may not serve as an external director if that persons position or other
business activities create, or may create, a conflict of interest with the persons
service as a director or may otherwise interfere with the persons ability to serve
as a director. If at the time any external director is appointed, all members of the
board are the same gender, then the external director to be appointed must be of the
other gender. A director of a company shall not be appointed as an external director of
another company if at such time, a director of the other company is acting as an external
director of the first company. Until the lapse of two years from the termination of
office, a company may not engage an external director to serve as an office holder and
cannot employ or receive services from that person, either director or indirectly,
including through a corporation controlled by that person.

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

| |  | the
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 our
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. External directors may be removed only by
the same special majority required for their election or by a court, and then only if the
external directors cease to meet the statutory qualifications for their appointment or if
they violate their duty of loyalty to our company. In the event of a vacancy created by
an external director, our board of directors is required under the Companies Law to call
a shareholders meeting to appoint a new external director. Dr. Michael Anghel and Dan
Suesskind serve as our external directors.

External
directors may be compensated only in accordance with regulations adopted under the
Companies Law. The regulations provide three alternatives for cash compensation to
external directors: a fixed amount determined by the regulations, an amount within a range
set in the regulations, or an amount that is equal to the average compensation to other
directors who are not controlling shareholders of the company or employees or service
providers of the company or its affiliates. A company also may issue shares or options to
an external director at the average amount granted to directors who are not controlling
shareholders of the company or employees or service providers of the company or its
affiliates. Cash compensation at the fixed amount determined by the regulations does not
require shareholder approval. Compensation determined in any other manner requires the
approval of the companys audit committee, board of directors and shareholders.
Compensation of an external director must be determined prior to the persons consent
to serve as an external director.

# Committees of the Board
of Directors

Our
board of directors has established three standing committees, the audit committee, the
compensation committee and the nominating and governance committee.

Audit
Committee. Under the Companies Law, the board of directors of any public company must
establish an audit committee. The audit committee must consist of at least three directors
and must include all of the external directors. The audit committee may not include the
chairman of the board, any director employed by the company or providing services to the
company on an ongoing basis, a controlling shareholder or any of the controlling
shareholders relatives. In addition, under the listing requirements of the Nasdaq
Global Select Market, we are also required to maintain an audit committee of at least
three members, all of whom are independent directors under the Nasdaq Global Select Market
listing requirements. The rules of the Nasdaq Global Select Market also require that at
least one member of the audit committee be a financial expert.

40

---

---

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. Krindel.
All of the audit committee members have been determined to be independent as defined by
the applicable NASDAQ and SEC rules.

The
audit committee provides assistance to the board of directors in fulfilling its legal and
fiduciary obligations in matters involving our accounting, auditing, financial reporting,
internal control and legal compliance functions by approving the services performed by our
independent accountants and reviewing their reports regarding our accounting practices and
systems of internal accounting controls. The audit committee also oversees the audit
efforts of our independent accountants and takes those actions as it deems necessary to
satisfy itself that the accountants are independent of management. Under the Companies
Law, the audit committee also is required to monitor deficiencies in the administration of
the company, including by consulting with the internal auditor, and to review and approve
related party transactions.

Compensation
Committee. Our compensation committee, acting pursuant to a written charter, is
comprised of Dr. Anghel, Ms. Krindel and Mr. Butler. The composition and functions of the
compensation committee meet the requirements of the Nasdaq Global Select Market rules,
with which we comply voluntarily. All of the compensation committee members have been
determined to be independent as defined by the applicable Nasdaq rules. The compensation
committee makes recommendations to the board of directors regarding the issuance of
employee share incentives under our share option and benefit plans and determines salaries
and bonuses for our Chief Executive Officer and incentive compensation for our other
employees.

Nominating
and Governance Committee. Our nominating and governance committee, acting pursuant to
a written charter, is comprised of Dr. Anghel, Ms. Krindel and Mr. Butler. The committee
is responsible for making recommendations to the board of directors regarding candidates
for directorships and the size and composition of the board. In addition, the committee is
responsible for overseeing our corporate governance guidelines and reporting and making
recommendations to the board concerning corporate governance matters. The composition and
function of our nominating and governance committee meets the requirements of the rules of
the Nasdaq Global Select Market, with which we comply voluntarily. All of the nominating
committee members have been determined to be independent as defined by the applicable
Nasdaq rules.

# Internal Auditor

Under
the Companies Law, the board of directors must also appoint an internal auditor nominated
by the audit committee. Our internal auditor is Ezra Yehuda, C.P.A. (Isr). The role of the
internal auditor is to examine whether a companys actions comply with the law and
proper business procedure. The internal auditor may not be an interested party or office
holder, or a relative of any interested party or office holder, and may not be a member of
the companys independent accounting firm or its representative. The Companies Law
defines an interested party as a holder of 5% or more of the shares or voting rights of a
company, any person or entity that has the right to nominate or appoint at least one
director or the general manager of the company or any person who serves as a director or
as the general manager of a company. Our internal auditor is not our employee, but the
managing partner of an accounting firm which specializes in internal auditing.

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

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

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

Some
provisions of the collective bargaining agreement between the Histadrut, which is the
General Federation of Labor in Israel, and the Coordination Bureau of Economic
Organizations, including the Industrialists Association of Israel, apply to our
Israeli employees by virtue of extension orders of the Israeli Ministry of Industry,
Commerce & Employment.

41

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---

These
provisions concern the length of the workday and the work-week, recuperation pay and
commuting expenses. Furthermore, these provisions provide that the wages of most of our
employees are adjusted automatically based on changes in Israels Consumer Price
Index. The amount and frequency of these adjustments are modified from time to time. In
addition, Israeli law determines minimum wages for workers, minimum vacation pay, sick
leave, determination of severance pay and other conditions of employment. We have never
experienced a work stoppage, and we believe our relations with our employees are good.

Israeli
law generally requires the payment of severance pay by employers upon the retirement or
death of an employee or termination of employment without cause. As of December 31, 2008,
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 18% of wages, up to a specified amount of which the employee
contributes approximately 12% and the employer contributes approximately 6%.

In
Israel, we are subject to the instructions of the Extension Order in the Industrial Field
for Extensive Pension Insurance 2006 according to the Israeli Collective Bargaining
Agreements Law, 1957 (the Extension Order). The Extension Order ensures the
pension insurance of certain employees which fall under its criteria.

In
accordance with our policy and the provisions of the Extension Order, we make
contributions to the Pension Fund and/or Insurance Policy. Therefore, all our obligations
to pay severance pay are covered by the aforementioned contributions, in accordance with
Section 14 of the Severance Pay Law and the Extension Order or any other applicable law.

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

The
following table sets forth information regarding the beneficial ownership of our ordinary
shares as of February 15, 2009 by our executive officers and directors:

Beneficial
ownership of shares is determined in accordance with the rules of the SEC and generally
includes any shares over which a person exercises sole or shared voting or investment
power. Ordinary shares that are subject to warrants or stock options that are presently
exercisable or exercisable within 60 days of the date of February 15, 2009 are deemed to
be outstanding and beneficially owned by the person holding the stock options for the
purpose of computing the percentage ownership of that person, but are not treated as
outstanding for the purpose of computing the percentage of any other person.

Except
as indicated in the footnotes to this table, each shareholder in the table has sole voting
and investment power for the shares shown as beneficially owned by them. Percentage
ownership is based on 24,479,775 ordinary shares outstanding on February 15, 2009.

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

---

* equals less than 1%

|(1) | Includes
2,287,331 shares held by Starlight Capital Ltd and 341,816 shares held                by
European High-Tech Capital S.A., which are corporations wholly owned by
               foundations that were created for the benefit of members of Dr. Eckhouses
               family. Dr. Eckhouse disclaims beneficial ownership of these shares.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Mr.
Schlachet ceased to serve as our Chief Executive Officer on May 14, 2007.
|--- | -----------------------------------------------------------------------------

|(3) | Mr.
Gerstel ceased to serve as our Chief Executive Officer in February 2009.
|--- | ----------------------------------------------------------------------------

42

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# Employee Benefit Plans

As
of December 31, 2008, we had 15,931 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, 2008, we had 3,942,178 options and RSUs outstanding.

Prior
to the adoption of the 2004 Plans, we maintained one equity incentive plan adopted in
2003, which served as an umbrella plan for all of our employees, directors, officers and
other eligible persons worldwide. Prior to the 2003 Plan, we granted options according to
individual agreements with the grantees, without adopting a specific plan. We adopted both
the 2003 Plan and the 2004 Israel Plan under Section 102 of the Israeli Income Tax
Ordinance.

Options
granted to employees under the 2003 Plan generally vest over three to four years from the
grant date. Any option not exercised within seven years of the grant date will expire
unless extended by the board of directors. If we terminate the engagement with a grantee
for cause, all of his or her vested and unvested options expire immediately. If we
terminate the engagement with a grantee for any other reason or the grantee resigns, the
grantee may exercise his or her vested options within six months of the date of
termination. A grantee who terminates his or her engagement with us due to death or
disability may exercise his or her options (or in case of death, by the estate or the
legal successor of the grantee) within 12 months of the date of death or disability. In
case of retirement, the post-retirement period of exercise is set at the discretion of the
board of directors or the compensation committee. Any expired or terminated options return
to the plan and are automatically cancelled.

Under
the 2003 Plan, we have granted to our directors, officers, employees and consultants and
those of any of our subsidiaries, options to purchase our ordinary shares. Since May 12,
2004, all option grants to our Israeli employees have been issued under the 2004 Israel
Plan and, unless we adopt a new plan, all such grants in the future will be issued under
the 2004 Israel Plan. The 2004 Israel Plan also allows for beneficial tax treatment for
options issued through a trustee. Based on Israeli law currently in effect and elections
made by us, and provided that options granted or, upon their exercise, the underlying
shares, issued under the plan are held by the trustee for at least two years following the
end of the calendar year in which the options are granted, Israeli employees are (i)
entitled to defer any taxable event with respect to the options until the underlying
shares are sold, and (ii) subject to capital gains tax of 25% on the sale of the shares.
We may not recognize expenses pertaining to the options for Israeli tax purposes.

Israeli
tax law allows us to choose from among three alternative sets of tax treatment for our
2004 Israel Plan or future plans. In approving the 2004 Israel Plan, the board of
directors selected the capital gains tax treatment described above.

Under
the 2004 United States, Canada and Rest of World Plan, we may grant to our non-Israeli
directors, officers, employees and consultants, options and other incentive awards to
purchase our ordinary shares. These plans were adopted to allow favorable tax treatment
for our United States and Canadian directors, officers, employees and consultants. Since
May 12, 2004, all option grants to our non-Israeli employees have been issued under the
2004 United States, Canada and Rest of World Plan and, unless we adopt a new plan, all
such grants in the future will be issued under the 2004 United States, Canada and Rest of
World Plan.

Options
granted under the 2004 Plans generally vest over a period of one to three years of
employment. Any options that are cancelled or forfeited before expiration become available
for future grants. The Company can also issue a variety of other equity incentives under
the 2004 Plans, but no such other equity incentives were outstanding as of December 31,
2005. In addition to granting stock options during 2006, the Company started to routinely
grant Restricted Stock Units (RSUs) under the 2004 United States, Canada and Rest of World
Plan. RSUs usually vest over a period of employment of up to three years. Upon vesting,
the RSU beneficiary is entitled to receive a share per one RSU for $0.01 per share. RSUs
that are cancelled or forfeited become available for future grants.

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 regarding the beneficial ownership of our ordinary
shares as of February 15, 2009 by each person or entity that we know beneficially owns 5%
or more of our outstanding ordinary shares.

Beneficial
ownership of shares is determined in accordance with the rules and regulations of the
Securities and Exchange Commission (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 February 15, 2009 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.

43

---

---

Except
as indicated in the footnotes to this table, each shareholder in the table has sole voting
and sole investment power for the shares shown as beneficially owned by them. Percentage
ownership is based on 27,479,775 ordinary shares outstanding as of February 15, 2009.

|                                                 | Bumber of
Shares
Neneficially
Owned | Percentage
of
Outstanding
ordinary
Shares
|------------------------------------------------ | ----------------------------------- | -----------------------------------------
|
|
|
|
|The Baupost Group, LLC (1)                       |                                     |                                          
|Starlight Capital Ltd.(2)                        |                                     |                                          
|Brandywine Global Investment Management, LLC (3) |                                     |                                          

|(1) | The
information is solely based upon Amendment No. 3 to Schedule 13G filed with
               the SEC on February 12, 2009 by the Baupost Group, LLC (Baupost),
               SAK Corporation and Seth A. Klarman. SAK Corporation is the Manager of
Baupost.                Seth A. Klarman, as the sole Director of SAK Corporation and a
controlling                person of Baupost, may be deemed to have beneficial ownership
of the securities                beneficially owned by Baupost. Securities reported on
the Schedule 13G as being                beneficially owned by Baupost includes
securities purchased on behalf of various                investment limited partnerships.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(3) | The
information is solely based upon Amendment No. 1 to Schedule 13G filed with
               the SEC on February 17, 2009 by Brandywine Global Investment Management,
LLC.                Brandywine Global Investment Management, LLC has the sole voting
power over                1,667,918 of these ordinary shares and the shared dispositive
power over all of                these ordinary shares.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

To
our knowledge, the only significant changes in the percentage ownership held by our major
shareholders during the past three years have been: (i) the sale by Cititrust Bahamas
Ltd., which is a trust that was created for the benefit of our retired Chief Technology
Officer and director, Dr. Michael Kreindel, of part of its holdings pursuant to 10b5-1
plans, (ii) the increase in the percentage ownership held by the Baupost Group, LLC from
5.52% (based on a Schedule 13G filed on February 13, 2007) to 11.23% (based on a Amendment
No. 3 to Schedule 13G filed on February 12, 2009), (iii) the purchase by Brandywine Global
Investment Management, LLC of our ordinary shares, based on a Amendment No.1 to Schedule
13G filed on February 17, 2009.

Our
major shareholders have the same voting rights with respect to their respective ordinary
shares as other shareholders have with respect to their respective ordinary shares.

To
our knowledge, as of February 15, 2009, we had 9* stockholders of record who were
registered with addresses in the United States. These holders in the United States were as
of such date, the holders of record of approximately 9.8%* of our outstanding ordinary
shares.

---

* Includes the Depository
Trust Company

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

# Agreements with
Directors and Officers

Our
articles of association permit us to exculpate, indemnify and insure our directors and
officers to the fullest extent permitted by the Companies Law. We have entered into
agreements with each of our office holders, including our directors, undertaking to
exculpate, indemnify and insure them to the fullest extent permitted by law, to the
extent that these liabilities are not covered by insurance. See Item 10.B
Memorandum And Articles Association  Exculpation, Indemnification and Insurance of
Directors and Officers.

44

---

---

# Registration Rights

Prior
to our initial public offering, we issued preferred shares to Starlight Capital Ltd.,
European High-Tech Capital S.A. and Marshall Butler. Starlight Capital Ltd. and European
High-Tech Capital S.A. are controlled by foundations which have been established for the
benefit of family members of Dr. Shimon Eckhouse, the chairman of our board of directors.
Dr. Eckhouse disclaims beneficial ownership of the shares held by these companies.
Marshall Butler is a member of our board of directors. All of these preferred shares were
subject to registration rights, and all of these preferred shares were automatically
converted into ordinary shares at the closing of our initial public offering. As of
February 15, 2009, we believe that these shareholders continue to hold a certain amount of
ordinary shares issued upon conversion of our preferred shares subject to such
registration rights. Pursuant to these registration rights, in the event we propose to
register any of our securities under the Securities Act, either for our own account or for
the account of other security holders, these and other holders who may hold shares subject
to registration rights are entitled to notice of such registration and are entitled to
include their remaining ordinary shares subject to the registration rights in such
registration, subject to certain marketing cutbacks and other limitations. The holders of
at least 50% of the ordinary shares with registration rights will have the right to
require us, on not more than one occasion, to file a registration statement on the
appropriate form under the Securities Act in order to register the resale of their
ordinary shares. We may, in certain circumstances, defer such registration and the
underwriters have the right, subject to certain limitations, to limit the number of shares
included in such registrations. Further, these holders may require us to register the
resale of all or a portion of their shares on a Registration Statement on Form F-3,
subject to certain conditions and limitations.

# Shareholders
Rights Plan

In
November 2008, our board of directors adopted a shareholder rights plan, under which our
board of directors declared a dividend of one right for each ordinary share held by
shareholders of record as of the close of business on November 9, 2008. Initially, these
rights will not be exercisable and will trade with our ordinary shares. Under the plan,
these rights will generally be exercisable only if a person or group acquires beneficial
ownership of 15 percent or more of our ordinary shares or commences a tender or exchange
offer for 15 percent or more of our ordinary shares, except if such person or group has
become an Acquiring Person pursuant to an offer approved by the majority of
the board of directors. If a person or group acquires beneficial ownership of 15 percent
or more of our ordinary shares (except if such person or group has become an
Acquiring Person pursuant to an offer approved by the majority of the board of
directors), each right will generally entitle the holder, other than the acquiring person
or group, to acquire, for the exercise price of $0.01 per share (subject to adjustment as
provided in the plan), two (2) ordinary shares. In addition, if, after a person acquires
such ownership, we engages in a merger in which it is not the survivor or its ordinary
shares are changed or exchanged, or sells or transfers more than 50 percent of its assets
or earning power, each right will generally entitle the holder, other than the acquiring
person or group, to acquire, for the exercise price of $0.01 per share (subject to
adjustment as provided in the plan), two (2) times the shares of the acquiring company to
which each of our shareholders is entitled to for each ordinary shares. Our board of
directors may redeem the rights at a price of $.0001 per right at any time up to ten days
after a person or group acquires beneficial ownership of 15 percent or more of our
ordinary shares. The rights plan will continue in effect until November 9, 2009 unless
earlier redeemed or amended by our board of directors.

|C. | INTERESTS
OF EXPERTS AND COUNSEL
|-- | --------------------------------

Not
applicable.

|ITEM 8. |  | FINANCIAL INFORMATION
|------- |  | ---------------------

|A. | Consolidated
Statements and Other Financial Information
|-- | -------------------------------------------------------

Our
audited consolidated financial statements for the year ended December 31, 2008 are
included in this Annual Report on Form 20-F under Item 18, Financial
Statements.

Legal
Proceedings.

On
December 31, 2007, Torkaman and Torabi Dental Corporation filed a complaint against us,
Syneron Inc. and Scott Cote. Plaintiff alleges that we represented that dentists who
purchased our products did not need to have a medical doctor or other medically trained
personnel operate the device and that it could be legally operated by an aesthetician.
Plaintiff alleges that it purchased the equipment in reliance upon these representations.
Plaintiff further alleges that based on our misrepresentation, he set up a dental spa
operation and has suffered economic damage as a consequence of not being able to operate
the dental spa in the manner represented by us. Our insurance carrier is not expected to
cover this complaint. We intend to vigorously defend its position in this case. 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.

On
March 10, 2009 our subsidiary, Syneron Inc. was served with a complaint from Palomar
Medical Technologies, Inc. The complaint alleges infringement of US Patents Nos. 5,735,844
and 5,595,568 by hair removal products sold in the United States. These patents are each
currently being reexamined by the U.S. Patent and Trademark Office based on different
prior art. Syneron Inc.s response to the complaint is due May 10, 2009.

On or before March 27, 2009, we expect to receive $3,975,000 as consideration for the
resolution of a dispute.

For
other legal proceedings see also Notes 13c and 19 to our consolidated financial
statements.

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.

45

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|B. | SIGNIFICANT
CHANGES
|-- | -------------------

None.

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

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

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

The
following table sets forth, for the periods indicated since August 5, 2004, which was the
date on which our ordinary shares began trading on the Nasdaq Global Select Market
(formerly known as the Nasdaq National Market), the high and low sales prices of our
ordinary shares as reported by the Nasdaq Global Market.

Nasdaq
Global Market

| |                                        | Price per share (US$)
| | -------------------------------------- | ---------------------
|
|
|
|
| | Yearly highs and lows                  |                      
| | 2004                                   |                      
| | 2005                                   |                      
| | 2006                                   |                      
| | 2007                                   |                      
| | 2008                                   |                      
| |                                        |                      
| | Quarterly highs and lows               |                      
| |                                        |                      
| | 2007                                   |                      
| | First quarter                          |                      
| | Second quarter                         |                      
| | Third quarter                          |                      
| | Fourth quarter                         |                      
| | 2008                                   |                      
| | First quarter                          |                      
| | Second quarter                         |                      
| | Third quarter                          |                      
| | Fourth quarter                         |                      
| | 2009                                   |                      
| | First quarter (through March 23, 2009) |                      
| |                                        |                      
| | Monthly highs and lows                 |                      
| |                                        |                      
| | September 2008                         |                      
| | October 2008                           |                      
| | November 2008                          |                      
| | December 2008                          |                      
| | January 2009                           |                      
| | February 2009                          |                      

On March 23, 2009, the closing
price of our ordinary share as quoted on Nasdaq Global Select Market was $5.86

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

Not
applicable.

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

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

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

Not
applicable.

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

Not
applicable.

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

Not
applicable.

46

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

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

Not
applicable.

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

Set
forth below is a summary of certain provisions of our Amended and Restated Articles of
Association, as adopted by our shareholders on November 7, 2007, and Israeli law affecting
our shareholders. This summary does not purport to be complete and is qualified in its
entirety by reference to our amended and restated articles of association and such law. On
November 7, 2007 our shareholders adopted the amended and restated articles of association
of the Company (for the purposes of this Item, the Amended Articles)

# Register Number and
Purposes of the Company

Our
registration number with the Israeli Companies Registrar is 51-298651-4. Pursuant to
Section 4 of our Amended Articles we may engage in any type of lawful business as may be
determined by our board of directors from time to time.

# Dividend and Liquidation
Rights

Holders
of our ordinary shares are entitled to their proportionate share of any cash dividend,
share dividend or dividend in kind declared with respect to our ordinary shares. We may
declare dividends out of profits legally available for distribution. Under the 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 Amended Articles provide that the board of directors may declare and
distribute dividends without the approval of the shareholders. In the event of our
liquidation, holders of our ordinary shares have the right to share ratably in any assets
remaining after payment of liabilities, in proportion to the paid-up par value of their
respective holdings.

These
rights may be affected by the grant of preferential liquidation or dividend rights to the
holders of a class of shares that may be authorized in the future.

# Voting, Shareholder
Meetings and Resolutions

Holders
of ordinary shares have one vote for each ordinary share held on all matters submitted to
a vote of shareholders. This right may be changed if shares with special voting rights are
authorized in the future.

Under
the Companies Law, an annual general meeting of our shareholders should be held once every
calendar year, but no later than 15 months from the date of the previous annual general
meeting. The quorum required for a general meeting of shareholders consists of at least
two shareholders present in person or by proxy holding at least 40.0% of the voting power.
A meeting adjourned for lack of a quorum generally is adjourned to the same day in the
following week at the same time and place or any time and place as the directors designate
in a notice to the shareholders. At the reconvened meeting, the required quorum consists
of any number of shareholders present in person or by proxy.

Our
board of directors may, in its discretion, convene additional meetings as special
general meetings. In addition, the board must convene a special general meeting upon
the demand of two of the directors, one fourth of the nominated directors, one or more
shareholders having at least 5% of outstanding share capital and at least 1% of the voting
power in the company, or one or more shareholders having at least 5% of the voting power
in the company. The chairman of the board of directors presides at each of our general
meetings. The chairman of the board of directors is not entitled to a vote at a general
meeting in his capacity as chairman.

Most
shareholders resolutions, including resolutions to:

| |  | amend
our articles of association (except for amendments relating to the election of
                  directors and the powers, composition and size of the board of
directors);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | make
changes in our capital structure such as a reduction of capital, increase of capital
                  or share split, merger or consolidation;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

47

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| |  | 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
Amended Articles and the laws of the State of Israel do not restrict the ownership or
voting of ordinary shares by non-residents of Israel, except with respect to individuals
and entities that are residents of countries in a state of war with Israel, and except
with respect to entities which are controlled by residents of countries in a state of war
with Israel.

Our
fully paid ordinary shares are issued in registered form and are freely transferable under
our Amended Articles.

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

Under the
Companies Law, we are required to maintain a major shareholder register listing
shareholders holding 5% or more of our outstanding ordinary shares.

# Modification of Class
Rights

The
Companies Law provides that the rights of a particular class of shares may not be modified
without the vote of a majority of the affected class.

# Election of Directors

Our
ordinary shares do not have cumulative voting rights in the election of directors.
Therefore, the holders of ordinary shares representing more than 50% of the voting power
at the general meeting of the shareholders, in person or by proxy, have the power to elect
all of the directors whose positions are being filled at that meeting, to the exclusion of
the remaining shareholders. External directors are elected by a majority vote at a
shareholders meeting, provided that either:

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

| |  | the
total number of shares of non-controlling shareholders voted against the election of the
external director does not exceed one percent of the aggregate voting rights in the
company.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each
of our directors holds office until the next annual general meeting of shareholders.
However, in accordance with the Companies Law, our external directors serve for three
years, which may be renewed for additional three year terms, if both the audit committee
and the board of directors confirm that in light of the expertise and contribution of the
external director, the extension of such external directors term would be in the
interest of our company (such requirement is not applicable to the first three-year
renewal). The Companies Law requires that the offices of the Chief Executive Officer and
the Chairman of the Board of Directors be held by different persons. However, the
Companies Law further provides that those positions may be held by the same person for a
period not exceeding three years if approved by a majority of the companys
shareholder, including at least two thirds of the voting shareholders present (shares held
by abstaining shareholders are not considered) which are not controlling shareholders or
the aggregate number of shares voting against the proposal shall not exceed 1% of company
voting shareholders.

The
Companies Law provides that Israeli public companies must have at least two external
directors. External directors may be elected at our annual general meeting or a special
meeting of our shareholders in a number and manner stipulated by law, namely, for a term
of three years which may be renewed for additional three year terms and requires the
affirmative vote of a majority of the shares and in addition either that (i) at least one
third (33.33%) of the holders of shares who are not controlling shareholders attending in
person or represented by proxy have voted in favor of the proposal (shares held by
abstaining shareholders shall not be considered) or (ii) the aggregate number of shares
voting against the proposal has not exceeded 1% of the companys voting shareholders.
External directors may be removed from office only under the following circumstances: (i)
an external director ceases to meet the legal requirements for appointment as an external
director or breaches his or her fiduciary duty to the company and a resolution to remove
such external director is made by the shareholders at a meeting at which such external
director is granted a reasonable opportunity to express his position (such a resolution
requires the same majority of votes that elected the external director); (ii) an external
director ceases to meet the legal requirements for appointment as an external director or
breaches his or her fiduciary duty to the Company and a court orders that such director be
removed; or (iii) an external director is unable to perform his or her duties or is
convicted of certain felonies and a court orders that such director be removed.

48

---

---

An
external director is qualified for nomination as an external director, only if he/she has
either professional qualifications or accounting and financial expertise. At least one of
the external directors must have accounting and financial expertise. However, a company
whose shares are traded in certain exchanges outside of Israel, including the Nasdaq
Global Select Market, such as our company, is not required to nominate at least one
external director who has accounting and financial expertise as long as another
independent director for audit committee purposes who has such expertise serves on the
board of directors pursuant to the applicable foreign securities laws. In such case all
external directors will have professional qualification.

Regulations
adopted under the Companies Law provide that a director with accounting and financial
expertise is a director that due to his education, experience and skills has high
expertise and understanding in business-accounting matters and financial statements in a
way that enables him to deeply understand the financial statements of the company and to
facilitate discussion with respect to the way the financial data should be presented. The
assessment of the accounting and financial expertise of a director shall be made by the
board of directors, who shall take into consideration, inter alia, the education,
experience and knowledge of the director in the following subjects:

| | (1) | Accounting
matters and audit accounting matters, which are typical to the sector                in
which the company works and of companies with the same size and complexity as
               of the company;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
duties and obligations of the auditing accountant; and
| | --- | ----------------------------------------------------------

| | (3) | Preparing
of financial statements and their approval according to applicable                law,
including securities law.
| | --- | --------------------------------------------------------------------------------------------------------------------------

The
regulations also provide that a director with professional qualifications is a director
who meets one of the following conditions:

| | (1) | A
holder of an academic degree in one of the following: economics, business
               administration, accounting, law, or public administration;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | A
holder of another academic degree or is otherwise a graduate of higher
               education in a major field of business of the company or in other field
which is                relevant to the role;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | He
has experience of at least five years in one of the following, or that he has
               cumulative experience of at least five years in two or more of the
following:
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | A
senior position in the business management of a corporation which has a
               significant scope of business;
| | --- | -----------------------------------------------------------------------------------------------------------------------

| | (b) | A
senior public position or in a senior role in the public service; or
| | --- | ----------------------------------------------------------------------

| | (c) | A
senior position in the companys major fields of business.
| | --- | ------------------------------------------------------------

According
to the Companies Law, the board of directors of a public company must establish the
minimum number of board members that are to have accounting and financial expertise while
considering, inter alia, the nature of the company, its size, the scope and
complexity of its operations and the number of directors stated in the Amended Articles.

The
board of directors resolved that the minimum number of board members that need to have
accounting and financial expertise, including the external director with accounting and
financial expertise is 1.

The
board of directors determined that Dr. Michael Anghel has accounting and financial
expertise as described in the regulations promulgated pursuant to Companies Law, and that,
therefore, the requirements of the minimum number of board members that need to have
accounting and financial expertise, as set by the board of directors, has been met.

On
September 29, 2008, Amendment No. 8 to the Companies Law came into effect. The amendment
states that a publicly traded company will be able to determine the number of independent
directors that will serve on the companys board of directors. The amendment also
sets a recommendation as to the number of independent directors a public company should
appoint to their board: (i) companies with a controlling shareholder  one third; and
(ii) other companies  a majority of the board. A Majority of our board members are
independent as required by Nasdaq rules, which are different than the independence
standard of the Companies Law.

Under
regulations promulgated under the Companies Law regarding payment of compensation to
external directors, compensation of external directors shall be comprised of annual
compensation and a per meeting payment ranging as stated in the regulations. These amounts
are adjusted twice a year in accordance with the Israeli consumer price index. With regard
to a company, which shares are traded in an exchange outside of Israel, and is subject to
laws which impose upon the external directors duties which exceed the duties imposed upon
them under Israeli law, the maximum amount payable to the external directors is NIS
115,400 per annum (approximately
 $28,326) and NIS 3,470 (approximately
 $852) per meeting.
The approval of the shareholders of the Company is required for such compensation, unless
it is between the maximum and fixed amounts set forth in these regulations. Alternatively,
the compensation of external directors may be linked to the compensation of other
directors subject to certain restrictions. Additionally, external directors may be
entitled to compensation in stock (including by way of granting options to purchase the
Companys stock), provided that such compensation is granted within the framework of
a stock incentive plan applicable to all other directors and further provided the amount
of stock granted or purchasable shall not fall below the lowest amount granted to any
other director and shall not exceed the average amount of stock granted to all other
directors. In 2008, these regulations were amended to allow an increased compensation to
external directors who are considered expert external directors under these
regulations.

49

---

---

See
Item 6.C, Directors, Senior Management and Employees  Board Practices
regarding our staggered board.

# Anti-Takeover
Provisions; Mergers and Acquisitions

Merger.
          The Companies Law permits merger transactions with the approval of each
          partys board of directors and shareholders. In accordance with the
          Companies Law, a merger may be approved at a shareholders meeting by a majority
          of the voting power represented at the meeting, in person or by proxy, and
          voting on that resolution. In determining whether the required majority has
          approved the merger, shares held by the other party to the merger, any person
          holding at least 25% of the outstanding voting shares or means of appointing
the           board of directors of the other party to the merger, or the relatives or
          companies controlled by these persons, are excluded from the vote.

Under
the Companies Law, a merging company must inform its creditors of the proposed merger. Any
creditor of a party to the merger may seek a court order blocking the merger, if there is
a reasonable concern that the surviving company will not be able to satisfy all of the
obligations of the parties to the merger. Moreover, a merger may not be completed until at
least 30 days have passed from the time that the shareholders of each company approved the
merger proposal and 50 days have passed from the time that a merger proposal was filed
with the Israeli Registrar of Companies.

In
addition, the Companies Law preserves provisions of its predecessor, the Companies
Ordinance, dealing with arrangements between a company and its shareholders. These
arrangements may be used to effect squeeze out transactions in which the target company
becomes a wholly owned subsidiary of the acquirer. These provisions generally require that
the merger be approved by at least 75% of the shares of participating shareholders and a
majority of the shareholders voting at a shareholders meeting. In addition to shareholder
approval, court approval of the transaction is required, which entails further delay.

A
merger, the acquisition of a controlling stake or any transaction in which all or
substantially all the assets of a company are de facto transferred to another company, may
require the approval of the Israeli Commissioner of Restrictive Trade Practices, in the
event that the aggregate annual sales volume in Israel of all the companies which are
parties to such transaction in the year preceding the merger, exceeds 150,000,000 NIS
(approximately $37,000,000, an amount which is adjusted on an annual basis) and the annual sales volume in Israel of at least two of the companies which are parties
to such transaction exceeds 10,000,000 NIS each (approximately $2,450,000, an amount which
is adjusted on an annual basis), and also if after the consummation of such
transactions, the joint market, in Israel, or at any identified geographic part of Israel
will be in excess of 50% with respect to such products and services.

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, Additional
Information  Taxation  Israeli Taxation.

# Transfer Agent and
Registrar

American
Stock Transfer & Trust Company is the transfer agent and registrar for our ordinary
shares.

# Listing

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

50

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# Approval of Related
Party Transactions under Israeli Law

# Office Holders

The
Companies Law codifies the fiduciary duties that office holders owe to a company. An
office holder is defined as any director, managing director, general manager, chief
executive officer, executive vice president, vice president, other manager directly
subordinate to the general manager or any other person assuming the responsibilities of
any of these positions regardless of that persons title. Each person listed in the
table under Item 6.A, Directors, Senior Management and Employees  Directors
and Senior Management is an office holder under the Companies Law.

Fiduciary
duties. An office holders fiduciary duties consist of a duty of loyalty and a
duty of care. The duty of loyalty requires the office holder to avoid any conflict of
interest between the office holders position in the company and personal affairs,
and proscribes any competition with the company or the exploitation of any business
opportunity of the company in order to receive personal advantage for himself or others.
This duty also requires him or her to reveal to the company any information or documents
relating to the companys affairs that the office holder has received due to his or
her position as an office holder. The duty of care requires an office holder to act with a
level of care that a reasonable office holder in the same position would employ under the
same circumstances. This includes the duty to use reasonable means to obtain information
regarding the advisability of a given action submitted for his or her approval or
performed by virtue of his or her position and all other relevant information pertaining
to these actions.

Compensation.
          Under the Companies Law, all compensation arrangements for office holders who
          are not directors require approval of the board of directors, unless the
          articles of association provide otherwise. Our compensation committee is
          required to approve the compensation of all office holders. Arrangements
          regarding the compensation of directors require audit committee, board and
          shareholder approval.

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.

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

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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
Amended Articles allow us to indemnify, exculpate and insure our office holders to the
fullest extent permitted by the Companies Law, provided that procuring this insurance or
providing this indemnification or exculpation is approved by the audit committee and the
board of directors, as well as by the shareholders where the office holder is a director.
Our Amended Articles also allow us to insure or indemnify any person who is not an office
holder, including any employee, agent, consultant or contractor who is not an office
holder.

Under
the Companies Law, a company may indemnify an office holder in respect of some
liabilities, either in advance of an event or following an event. If a company undertakes
to indemnify an office holder in advance of an event, the indemnification must be limited
to foreseeable types of events and reasonable amounts, as determined by the board of
directors.

Under
the Companies Law, a company may indemnify an office holder against any monetary liability
incurred in his or her capacity as an office holder whether imposed on him or her in favor
of another person pursuant to a judgment, a settlement or an arbitrators award
approved by a court. A company also can indemnify an office holder against reasonable
litigation expenses including attorneys fees, incurred by him or her in his or her
capacity as an office holder, in proceedings instituted against him or her by the company,
on its behalf or by a third-party, in connection with criminal proceedings in which the
office holder was acquitted, or as a result of a conviction for a crime that does not
require proof of criminal intent. The additional case in which a reimbursement of expenses
is allowed according to the Companies Law is reasonable legal fees, including attorneys
fees, incurred by an Office Holder in an investigatory proceeding or other proceeding
filed by a governmental authority, which has terminated without the filing of criminal
charges and without imposing a fine, or with imposing a fine in lieu of a criminal charge
which does not require proof of criminal intent.

Under
the Companies Law, a company may obtain insurance for an office holder against liabilities
incurred in his or her capacity as an office holder. These liabilities include a breach of
duty of care to the company or a third-party, a breach of duty of loyalty and any monetary
liability imposed on the office holder in favor of a third-party.

A
company may exculpate an office holder for a breach of duty of care, but only in advance
of that breach. A company may not exculpate an office holder from a breach of duty of
loyalty towards the company nor from a breach of duty of care with respect to a
distribution.

Under
the Companies Law, however, an Israeli company may only indemnify or insure an office
holder against a breach of duty of loyalty to the extent that the office holder acted in
good faith and had reasonable grounds to assume that the action would not prejudice the
company. In addition, an Israeli company may not indemnify, insure or exculpate an office
holder against a breach of duty of care if committed intentionally or recklessly unless it
was carried our negligently, or committed with the intent to derive an unlawful personal
gain, or for a fine or forfeit levied against the office holder in connection with a
criminal offense.

Our
audit committee, board of directors and shareholders have resolved to indemnify our
directors and officers to the extent permitted by law and by our Amended Articles for
liabilities not covered by insurance and that are of certain enumerated types of events,
subject to an aggregate sum equal to 50.0% of the shareholders equity outstanding at the
time a claim for indemnification is made.

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|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, Information on the Company  Business
Overview  Intellectual Property.

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

Effective
February 25, 2007, we entered into an exclusive Joint Development and Supply Framework
Agreement with the Procter & Gamble Company for the commercialization of patented and
patent pending, ELOS-based, home-use devices and compositions for the enhancement of skin
appearance through the treatment of fine lines, wrinkles, age and sun spots and cellulite.
Under the terms of the agreement we will lead the research, development and manufacturing
of the devices, while Procter & Gamble will focus on the development of the
compositions, marketing, and distribution of the devices. The agreement provides that
Procter & Gamble will purchase the devices exclusively from us. The devices will be
marketed under the Procter & Gamble family of skin care products and will be
co-branded with our ELOS technology. The agreement contemplates further collaboration
between Procter & Gamble that could lead to commercializing additional products in the
future. Procter & Gamble may terminate the agreement in certain circumstances,
including following the failure to successfully complete two milestones.

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

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

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

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

# ISRAELI TAXATION

|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.

Potential
investors are urged to consult their own tax advisors as to the Israeli or other tax
consequences of the purchase, ownership and disposition of our ordinary shares, including,
in particular, the effect of any foreign, state or local taxes.

# General Corporate Tax
Structure in Israel

Israeli
companies are generally subject to corporate tax on their taxable income at the rate of
27% for the 2008 tax year. This rate was reduced to 26% in 2009 and had been scheduled to
be reduced to 25% in 2010 and beyond. Israeli companies are generally subject to capital
gains tax at a rate of 25% for capital gains (other than gains deriving from the sale of
listed securities) derived after January 1, 2003. However, the effective corporate tax
rate payable by a company that derives income from an Approved Enterprise/Privileged
Enterprise (as further discussed below) may be considerably less.

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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 (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 (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
track of tax benefits under the Investments Law (the Alternative Track). Under
the Alternative Track, a companys undistributed income derived from the approved
enterprise will be exempt from corporate tax for a period of between two and ten years,
starting from the first year the company derives taxable income under the approved
enterprise program. The length of time of this exemption will depend on the geographic
location of the approved enterprise within Israel. After the exemption period lapses, the
company will be eligible for the reduced tax rate discussed in the previous paragraph for
the remainder of the benefit period. The Time Limit imposed on the Tax Benefit does not
limit this exemption under the Alternative Track.

The
Company has elected to be taxed under the Alternative Track. A company that has elected
the Alternative Track and subsequently pays a dividend out of income derived from the
approved enterprise during the tax exemption period will be subject to corporate tax on
the amount which is determined by the distributed amount grossed up with the effective
corporate tax rate which would have been applied had the company not elected the
Alternative Track, which is 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. In the event, however, that the company is qualifies as a
Foreign Investors as defined below, there is no such time limitation. The company
must withhold this tax at the source.

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.

54

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Under
the Alternative Track, dividends paid by a company are considered to be attributable to
income received from the entire company and the companys effective tax rate is the
result of a weighted average of the various applicable tax rates, excluding any tax-exempt
income. Under the Investments Law, a company that has elected the Alternative Track is not
obliged to distribute retained profits, and may generally decide from which years
profits to declare dividends. We currently intend to reinvest any income derived from our
approved enterprise program and not to distribute such income as a dividend.

Tax
benefits under the 2005 Amendment

An
amendment to the Investments Law, which effective as of April 1, 2005, has changed certain
provisions of the Investments Law. 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 commencement of the beginning of the year the privileged
enterprise was operated (reduced to a period of 2 years under certain conditions)..
According to the amendment, only approved enterprises receiving cash grants require the
prior approval of the Investment Center.

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.

The
basic condition for receiving the benefits under this track is that the enterprise
contributes to the countrys economic independence and is a competitive factor for
the Gross Domestic Product (a Competitive Enterprise). In order to
comply with this condition, the Law prescribes various requirements regarding industrial
enterprises. In each tax year during the benefit period, one of the following conditions
must be met:

| | 1. | The
enterprises main activity is in the area of biotechnology or
          nanotechnology as approved by the Head of the Administration of Industrial
          Research and Development, prior to the approval of the aforementioned plan.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
enterprises revenues during the tax year from the plants sales           in a
certain market do not exceed 75% of total revenues from the plants           total
sales during that tax year. A market is defined as a distinct
          country or customs territory.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | 25%
or more of the enterprises total revenues from the plants sales
          during the tax year are from sales to a certain market that numbers at least 12
          million residents.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

An
industrial enterprise that sells a specific product that constitutes a component in
another product manufactured by another industrial enterprise (which is, or was, a
beneficiary enterprise or an approved enterprise), the enterprise must meet the conditions
stipulated in the relevant regulations regarding the encouragement of capital investments.

In
order to receive the tax benefits, the amendment states that a company must make an
investment in the Privileged 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 Privileged 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 Privileged 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
Privileged 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 liable
income for tax purposes from the Privileged Enterprise, or the year of election which is
the year in which a company requested to have the tax benefits apply to the Privileged
Enterprise. The tax benefits granted to a Privileged Enterprise are determined, depending
on the geographic location of the Privileged Enterprise within Israel, according to one of
the following, which may be applicable to us:

| |  | Similar
to the currently available Alternative Track, exemption from corporate tax may be
available on undistributed income for a period of two to ten years, depending on the
geographic location of the Privileged Enterprise within Israel, and a reduced corporate
tax rate of 10% to 25% for the remainder of the benefit period, depending on the level of
foreign investment in each year. Benefits may be granted for a term of seven to ten
years, depending on the level of foreign investment in the company. If the company pays a
dividend out of income derived from the Privileged Enterprise during the tax exemption
period, such income will be subject to 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
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

55

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| |  | A
special track which enables companies owning facilities in certain geographical locations
in Israel to pay corporate tax at the flat rate of 11.5% on income of the Privileged
Enterprise (the Irish Track). The benefit period is for ten years. Upon
payment of dividends, the company is required to withhold tax on such dividend at a rate
of 15% for Israeli residents and at a rate of 4% for foreign residents.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Generally,
a company that is Abundant in Foreign Investment (owned by at least 74% foreign
shareholders and has undertaken to invest a minimum sum of $20 million in the Privileged
Enterprise) is entitled to an extension of the benefit period by an additional five years,
depending on the rate of its income that is derived in foreign currency.

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.

As
a result of the amendment, tax-exempt income generated under the provisions of the
Investments Law, as amended, will subject us to taxes upon distribution or liquidation and
we may be required to record deferred tax liability with respect to such tax-exempt
income.

Currently
we have three approved programs under the Investments Law, which entitles us to some tax
benefits. The first program under the Law before the amendment (Approved Enterprise) and
the second and third after the amendment (Privileged Enterprise). The above mentioned
approved programs are subject to the Alternative Track provisions, which allows for a ten
years period of exemption of taxes for undistributed income.

A
substantial portion of our taxable operating income is derived from our approved
enterprise program and we expect that a substantial portion of any taxable operating
income that we may realize in the future will be also derived from such program.

The
tax benefits attributable to our current Approved Enterprises and Privileged Enterprise
are scheduled to expire in phases by 2016.

If
a company requested the alternative package of benefits for an Approved Enterprise under
the old law before the 2005 amendment, it was precluded from filing a Year of Election
notice for a Privileged Enterprise for three years after the year in which the Approved
Enterprise was activated (the Cooling Period). In November 2008, the law was
amended to shorten the Cooling Period to two years.

# Law for the
Encouragement of Industry (Taxes), 1969

We
believe that we qualify as an Industrial Company within the meaning of the Law
for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law. The
Industry Encouragement Law defines Industrial Company as a company resident in
Israel, of which 90% or more of its income in any tax year, other than of income from
defense loans, capital gains, interest and dividends, is derived from an Industrial
Enterprise owned by it. An Industrial Enterprise is defined as an
enterprise whose major activity in a given tax year is industrial production activity.

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

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

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

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

| |  | 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 will continue to
qualify as an Industrial Company or that the benefits described above will be
available in the future.

# Taxation of the Company
Shareholders

Dividends

According
to the investment law any distribution of dividend from income attributed to an Approved
Enterprise or a Privileged Enterprise under the Investments Law will generally be subject
to tax in Israel at the rate of 15% A tax rate of 4% will be applied in respect of
dividend distributed to a non-Israeli resident from income derived by a Privileged
Enterprise under the Irish Track), subject to a reduced rate under any applicable double
tax treaty (see below the description of relevant provisions of Israel U.S. double tax
treaty in respect of dividend income).

56

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Any distribution of dividend from
income, which is not attributed to an Approved Enterprise/Privileged
Enterprise, will be subject to tax, at the following rates:

Israeli
resident

| |  | Individual
 The distribution of dividend by an Israeli resident company to an Israeli
resident individual will generally be subject to income tax at a rate of 20%. However, a
25% tax rate will apply if the dividend recipient is a Significant Shareholder (i.e.,
a person who holds, directly or indirectly, alone or together with other, 10% or more of
one of the Israeli resident companys means of control at the time of distribution
or at any time during the preceding 12 months period).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Corporation
 Dividend distributed by an Israeli resident corporation to another Israeli
resident corporation will be generally exempt from income tax provided the income from
which such dividend is distributed was derived or accrued within Israel.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Non
Israeli resident

Under
the Israeli income tax ordinance non-Israeli resident (either individual or corporation)
is generally subject to an Israeli income tax on the receipt of dividends at the rate of
20% (25% if the dividends recipient is a Significant Shareholder (as defined
above), those rates are subject to a reduced tax rate under an applicable double tax
treaty. Thus, under the Double Tax Treaty concluded between the State of Israel and U.S.
the following rates will apply in respect of dividend distributed by an Israeli resident
company to a U.S. resident:

| | (i) | If
the U.S. resident is a corporation which holds at the taxable year which
               precede the date of payment of the dividend and during the whole of its
prior                taxable year (if any), at least 10% of the outstanding shares of the
voting                stock of the Israeli resident paying corporation and not more then
25% of the                gross income of the Israeli resident paying corporation for
such prior taxable                year (if any) consists of certain type of interest or
dividends  the tax                rate is 12.5%.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | If
both the conditions mentioned in section (i) above are met and the dividend
               is paid from an Israeli resident companys income which was entitled
to a                reduced tax rate applicable to an approved enterprise under
the                Investment Law the tax rate is 15%.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | In
all other cases, the tax rate is 25%.
| | ----- | ----------------------------------------

The afore-mentioned rates under the
Israel U.S. Double Tax Treaty will not apply if the dividend income was derived through a
permanent establishment of the U.S. resident in Israel.

Withholding
tax at source from dividend distributed by the company

An
Israeli resident company whose shares are listed in a stock exchange is obligated to
withhold tax, upon the distribution of a dividend, from the amount distributed, at the
following rates:

The
dividend distributed from an income attributed to the Approved Enterprise/Privileged
Enterprise

| |  | Israeli
resident corporation - 15%.
| | - | -----------------------------------

| |  | Israeli
resident individual - 15%.
| | - | ----------------------------------

| |  | Non-Israeli
resident  15% subject to a reduced tax rate under an applicable double tax treaty
(4% in respect of dividend distributed from income derived by a Privileged Enterprise
under the Irish Track, subject to a reduced tax rate under an applicable double tax
treaty)..
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
dividend distributed from an income not attributed to the Approved
Enterprise/Privileged Enterprise

| |  | Israeli
resident corporation - 0%.
| | - | ----------------------------------

| |  | Israeli
resident individual - 20%.
| | - | ----------------------------------

| |  | Non-Israeli
 resident - 20%  subject to a reduced  tax rate  under an  applicable  double tax
         treaty
| | - | -------------------------------------------------------------------------------------------------------------

57

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Capital
Gain Tax

General

Capital
gain tax is imposed on the disposal of capital assets by an Israeli resident and on the
disposal of such assets by a non- Israel resident if those assets are either (i) located
in Israel; (ii) they are shares or a right to a share in an Israeli resident corporation
(iii) they represent a directly or indirectly rights to assets located in Israel. The
Israeli Tax Ordinance distinguishes between Real Gain and the
Inflationary Surplus. Real Gain is the excess of the total capital gain over
Inflationary Surplus computed generally on the basis of the increase in the Israeli CPI
between the date of purchase and the date of disposal.

Inflationary
Surplus, that accrued until December 31, 1993, is subject to a tax rate of 10% while
Inflationary Surplus that accrued after this date is exempt from any tax.

Capital
Gain Tax Applicable to Israeli Resident Shareholders

The
Capital gain accrued at the sale of an asset purchased on or after January 1, 2003 will be
taxed as follows:

| |  | Individual
 The real capital gain will be subject to tax at the rate of 20%. If the
shareholder is a Significant Shareholder (see aforementioned) or if the capital
gain derived by an individual claiming deduction of financing expenses in respect of such
gain, the real capital gain will be taxed at the rate of 25%.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Corporation
 The real capital gain derived by corporation will be generally subject to tax at
the rate of 25%. However, the real capital gain derived from sale of securities, as
defined in Section 6 of the Inflationary Adjustment Law, by a corporation, which was
subject upon August 10, 2005 to the provisions of Section 6 of the Inflationary
Adjustment Law, will be taxed at the corporate tax rate (27% in 2008, 26% in 2009).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Capital gain accrued at the sale of an asset purchased prior to January 1, 2003 will be
subject to tax at a blended rate. The marginal tax rate for individuals (up to 47% in
2008) and the regular corporate tax rate for corporations (27% in 2008, 26% in 2009) will
be applied to the gain amount which bears the same ratio to the total gain realized as the
ratio which the holding period commencing at the acquisition date and terminating on
January 1, 2003 bears to the total holding period. The remainder of the gain realized will
be subject to capital gains tax at the rates applicable to an asset purchased after
January 1, 2003 (see aforementioned).

Capital
Gain Tax Applicable to Non-Israeli Resident Shareholders

Capital
gain from the sale of the Shares by a non-Israeli shareholder are exempt under the Israeli
income tax ordinance from Israeli taxation provided the following cumulative conditions
are met: (i) the Shares were purchased upon or after the registration of the Shares at the
stock exchange (shares purchased on or after 1.1.2009 are not subject to this condition)
(ii) the seller doesnt have a permanent establishment in Israel to which the derived
capital gain is attributed (iii) if the seller is a corporation, less than 25% of its
means of control are held by Israeli resident shareholders. In addition, the sale of the
Shares may be exempt from Israeli capital gain tax under an applicable tax treaty. Thus,
the U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital gain tax in
connection with such sale, provided (i) the U.S. resident owned, directly or indirectly,
less than 10% of an Israeli resident companys voting power at any time within the 12
 month period preceding such sale; and (ii) the seller, being an individual, is
present in Israel for a period or periods of less than 183 days at the taxable year; and
(iii) the capital gain from the sale was not derived through a permanent establishment of
the U.S. resident in Israel.

Generally,
within 30 days of a transaction a detailed return, including a computation of the tax due,
should be submitted to the Israeli Tax Authority, and an advanced payment amounting to the
tax liability arising from the capital gain is payable. At the sale of traded securities,
the aforementioned detailed return may not be submitted and the advanced payment should
not be paid if all tax due was withheld at source according to applicable provisions of
the Israeli income tax ordinance and regulations promulgated thereunder.

Capital gain is also reportable on
the annual income tax return.

Taxation
of investors engaged in a business of trading securities

Individual
and corporate shareholder dealing in securities in Israel are taxed at the tax rates
applicable to business income (27%  tax rate (in 2008, 26% in 2009) for a
corporation and a marginal tax rate of up to 47% (in 2008, 46% in 2009) for individual).
If the shareholder is a non-Israeli resident then such taxation is subject to the
provision of any applicable double tax treaty.

Withholding
at source from capital gains upon the sale of traded securities

Either
the seller and the Israeli stockbrokers and the financial institution through which the
sold securities are held are obliged, subject to the above mentioned exemptions, to
withhold tax upon the sale of securities from the real capital gain. at the rate of 25% in
respect of a corporation and 20% in respect of an individual.

# Foreign Exchange
Regulations

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

58

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# UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS

The
following is a summary of the material U.S. federal income tax consequences of the
ownership and disposition of ordinary shares. The following discussion is not exhaustive
of all possible tax considerations. This summary is based upon the Internal Revenue Code
of 1986, as amended (the Code), regulations promulgated under the Code by the
U.S. Treasury Department (including proposed and temporary regulations), rulings, current
administrative interpretations and official pronouncements of the Internal Revenue Service
(the IRS), and judicial decisions, all as currently in effect and all of which
are subject to differing interpretations or to change, possibly with retroactive effect.
Such change could materially and adversely affect the tax consequences described below. No
assurance can be given that the IRS would not assert, or that a court would not sustain, a
position contrary to any of the tax consequences described below.

This
discussion does not address state, local, or foreign tax consequences of the ownership and
disposition of ordinary shares. See Israeli Taxation above.

This
summary is for general information only and does not address all aspects of the U.S.
federal income taxation that may be important to a particular holder in light of its
investment or tax circumstances or to holders subject to special tax rules, such as:
banks; financial institutions; insurance companies; dealers in stocks, securities, or
currencies; traders in securities that elect to use a mark-to-market method of accounting
for their securities holdings; tax-exempt organizations; real estate investment trusts;
regulated investment companies; qualified retirement plans, individual retirement
accounts, and other tax-deferred accounts; expatriates of the United States; persons
subject to the alternative minimum tax; persons holding ordinary shares as part of a
straddle, hedge, conversion transaction, or other integrated transaction; persons who
acquired ordinary shares pursuant to the exercise of any employee stock option or
otherwise as compensation for services; persons actually or constructively holding 10% or
more of our voting stock; and U.S. Holders (as defined below) whose functional currency is
other than the U.S. dollar.

This
discussion is not a comprehensive description of all of the U.S. federal tax consequences
that may be relevant with respect to the ownership and disposition of ordinary shares. We
urge you to consult your own tax advisor regarding your particular circumstances and the
U.S. federal income and estate tax consequences to you of owning and disposing of ordinary
shares, as well as any tax consequences arising under the laws of any state, local, or
foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or
other tax laws.

This
summary is directed solely to holders that hold their ordinary shares as capital assets
within the meaning of Section 1221 of the Code, which generally means as property held for
investment. For purposes of this discussion, the term U.S. Holder means a
beneficial owner of ordinary shares that is any of the following:

| | n | a
citizen or resident of the United States or someone treated as a U.S. citizen or resident
                  for U.S. federal income tax purposes;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | n | a
trust if a U.S. court can exercise primary supervision over the trust's administration
                  and one or more U.S. persons are authorized to control all substantial
decisions                   of the trust; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | a
trust in existence on August 20, 1996 that has a valid election in effect under
                  applicable Treasury Regulations to be treated as a U.S. person.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

59

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# 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 passive foreign investment company for U.S. federal income tax
purposes. We do not believe that we will be classified as a passive foreign
investment company for U.S. federal income tax purposes for our current taxable
year. However, see the discussion under Passive Foreign Investment Company
Considerations below.

Subject
to the discussion below under Information Reporting and Back-up Withholding, a
Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on
dividends received on ordinary shares unless that income is effectively connected with the
conduct by that Non-U.S. Holder of a trade or business in the United States.

# Foreign Tax Credit

Subject
to certain conditions and limitations, Israeli tax withheld on dividends may be deducted
from taxable income or credited against a U.S. Holders U.S. federal income tax
liability. The limitation on foreign taxes eligible for credit is calculated separately
with respect to specific classes of income. For this purpose, dividends distributed with
respect to the ordinary shares will generally constitute passive category
income or, in the case of certain U.S. Holders, general category income.
Any dividend income resulting from distributions we pay to a U.S. Holder with respect to
the ordinary shares generally will be treated as foreign source income for U.S. foreign
tax credit purposes; however, special rules will apply if we are a United
States-owned foreign corporation. In that case, distributions of current or
accumulated earnings and profits will be treated as U.S. source and foreign source income
in proportion to our earnings and profits in the year of the distribution allocable to
U.S. and foreign sources. We will be treated as a U.S.-owned foreign corporation as long
as stock representing 50% or more of the voting power or value of our ordinary shares is
owned, directly or indirectly, by U.S. persons. Foreign taxes allocable to the portion of
our distributions treated as from U.S. sources under these rules may not be creditable
against a U.S. Holders U.S. federal income tax liability on such portion. The rules
relating to the determination of foreign source income and the foreign tax credit are
complex, and availability of a foreign tax credit depends on numerous factors. Each U.S.
Holder should consult with its own tax advisor to determine whether its income with
respect to the ordinary shares would be foreign source income and whether and to what
extent that U.S. Holder would be entitled to the credit.

# Disposition of Ordinary
Shares

Upon
the sale or other disposition of ordinary shares, subject to the discussion below under
Passive Foreign Investment Company Considerations, a U.S. Holder generally
will recognize capital gain or loss equal to the difference between the amount realized on
the disposition and the holders adjusted tax basis in the ordinary shares. U.S.
Holders should consult their own advisors with respect to the tax consequences of the
receipt of a currency other than U.S. dollars upon such sale or other disposition.

In
the event there is an Israeli income tax on gain from the disposition of ordinary shares,
such tax should generally be the type of tax that is creditable for U.S. tax purposes;
however, because it is likely that the source of any such gain would be a U.S. source, a
U.S. foreign tax credit may not be available. U.S. Holders should consult their own tax
advisors regarding the ability to claim such credit.

60

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Gain
or loss upon the disposition of the ordinary shares will be treated as long-term if, at
the time of the sale or disposition, the ordinary shares were held for more than one year.
For tax years beginning before January 1, 2011, long-term capital gains realized by
non-corporate U.S. Holders are generally subject to a lower marginal U.S. federal income
tax rate than ordinary income, other than qualified dividend income, as defined above. The
deductibility of capital losses by a U.S. Holder is subject to limitations. In general,
any gain or loss recognized by a U.S. Holder on the sale or other disposition of ordinary
shares will be U.S. source income or loss for U.S. foreign tax credit purposes. U.S.
Holders should consult their own tax advisors concerning the source of income for U.S.
foreign tax credit purposes and the effect of the U.S.-Israel Tax Treaty on the source of
income.

Subject
to the discussion below under Information Reporting and Back-up Withholding, a
Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on
any gain realized on the sale or exchange of ordinary shares unless:

| |  | that
gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or
                  business in the United States, or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| |  | in
the case of any gain realized by an individual Non-U.S. Holder, that holder is present in
the United States for 183 days or more in the taxable year of the sale or exchange, and
other conditions are met.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Passive Foreign
Investment Company Considerations

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

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.

61

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The
passive foreign investment company rules described above will not apply to a U.S. Holder
if the U.S. Holder makes an election to treat us as a qualified electing fund. However, a
U.S Holder may make a qualified electing fund election only if we furnish the U.S. Holder
with certain tax information. We currently do not provide this information, and we do not
intend to take actions necessary to permit you to make a qualified electing fund election
in the event we are determined to be a passive foreign investment company. As an
alternative to making this election, a U.S. Holder of passive foreign investment company
stock which is publicly traded may in certain circumstances avoid certain of the tax
consequences generally applicable to holders of a passive foreign investment company by
electing to mark the stock to market annually and recognizing as ordinary income or loss
each year an amount equal to the difference as of the close of the taxable year between
the fair market value of the passive foreign investment company stock and the U.S.
Holders adjusted tax basis in the passive foreign investment company stock. Losses
would be allowed only to the extent of net mark-to-market gain previously included by the
U.S. Holder under the election for prior taxable years. This election is available for so
long as our ordinary shares constitute marketable stock, which includes stock
of a passive foreign investment company that is regularly traded on a
qualified exchange or other market. Generally, a qualified exchange or
other market includes a national market system established pursuant to Section 11A
of the Securities Exchange Act of 1934. A class of stock that is traded on one or more
qualified exchanges or other markets is regularly traded on an exchange or
market for any calendar year during which that class of stock is traded, other than in de
minimis quantities, on at least 15 days during each calendar quarter. We believe that the
Nasdaq Global Select Market will constitute a qualified exchange or other market for this
purpose. However, no assurances can be provided that our ordinary shares will continue to
trade on the Nasdaq Global Select Market or that the shares will be regularly traded for
this purpose.

The
rules applicable to owning shares of a passive foreign investment company are complex, and
each prospective purchaser who would be a U.S. Holder should consult with its own tax
advisor regarding the consequences of investing in a passive foreign investment company.

# Information Reporting
and Back-up Withholding

Generally,
information reporting requirements will apply to distributions on ordinary shares or
proceeds on the disposition of ordinary shares paid within the United States (and, in
certain cases, outside the United States) to U.S. Holders other than certain exempt
recipients, such as corporations. Furthermore, backup withholding (currently at 28%) may
apply to such amounts if the U.S. Holder fails to (i) provide a correct taxpayer
identification number, (ii) report interest and dividends required to be shown on its U.S.
federal income tax return, or (iii) make other appropriate certifications in the required
manner. U.S. Holders who are required to establish their exempt status generally must
provide such certification on IRS Form W-9.

Payments
to Non-U.S. Holders of distributions on, or proceeds from the disposition of, ordinary
shares are generally exempt from information reporting and backup withholding. However, a
Non-U.S. Holder may be required to establish that exemption by providing certification of
non-U.S. status on an appropriate IRS Form W-8.

Backup
withholding is not an additional tax. Amounts withheld as backup withholding from a
payment to you may be credited against your U.S. federal income tax liability and you may
obtain a refund of any excess amounts withheld by filing the appropriate claim for refund
with the IRS and furnishing any required information in a timely manner.

|F. | DIVIDENDS
AND PAYING AGENTS
|-- | ---------------------------

Not
applicable.

|G. | STATEMENT
BY EXPERTS
|-- | --------------------

Not
applicable.

|H. | DOCUMENTS
ON DISPLAY
|-- | --------------------

A
copy of each report submitted in accordance with applicable United States law is available
for public review at our principal executive offices. In addition, our filings with the
Securities and Exchange Commission may be inspected without charge at the SECs
Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.
Information on the operation of the Public Reference Room can be obtained by calling the
SEC at 1-800-SEC-0330. Our SEC filings are also available to the public from the
SECs website at www.sec.gov.

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 75% of our total revenues for
the year ended December 31, 2008. Substantially all of the remaining 25% were sales in
Euros. Since we conduct our business in U.S. dollars, our main exposure, if any, results
from changes in the exchange rate between the Euro and the U.S. dollar and NIS and U.S.
dollar. Our functional currency is the U.S. dollar. Our policy is to reduce exposure to
exchange rate fluctuations by having most of our assets and liabilities, as well as most
of our revenues and expenditures, in U.S. dollars, or U.S. dollar linked. Therefore, we
believe that the potential loss that would result from an increase or decrease in the
exchange rate may have a material impact on us.

62

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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 33% of our cash balances in bank deposits
and the remainder primarily in securities issued by the United States, by non-U.S.
governments and by high quality U.S and non U.S corporations featuring high credit rating
of A and up. We do not use derivative financial instruments to limit exposure to interest
rate risk. Our interest gains may decline in the future as a result of changes in the
financial markets; however we believe any such potential loss would be immaterial to us.

Our
investment portfolio of cash equivalents, corporate securities, and governmental debt
securities is subject to interest rate fluctuations. At December 31, 2008, we held $9.5
million in auction-rate securities (ARS). The ARS we invest in are mainly high quality
securities. At December 31, 2007, because of the short-term nature of our investment in
these securities, they were classified as available-for-sale and included in short-term
investments on our consolidated balance sheets. Subsequent to December 31, 2007, our
securities failed at auction due to a decline in liquidity in the ARS and other capital
markets. We will not be able to access our investments in ARS until future auctions are
successful, ARS are called for redemption by the issuers, or until sold in a secondary
market. As our investments in ARS currently lack short-term liquidity, we have
reclassified these investments as non-current as of December 31, 2008. During fiscal 2008,
we sold approximately $4.1 million of the ARS held at December 31, 2007. The recovery of
the remaining $9.5 million ARS held is based upon market factors which are not within our
control.

|ITEM 12. |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- |  | ------------------------------------------------------

Not
applicable.

# PART II

|ITEM 13. |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- |  | -----------------------------------------------

Not
applicable.

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

At
the closing of our initial public offering of our ordinary shares on August 11, 2004, all
of our outstanding preferred shares were converted into ordinary shares. Amendments to
articles of incorporation (relating only to ordinary shares and allowing, for example,
free transferability of shares) became effective upon the closing of our initial public
offering. Since our initial public offering, no instruments defining the rights of our
ordinary shares holders have been modified.

Pursuant
to our initial public offering, we sold an aggregate of 5,000,000 ordinary shares at a per
share offering price of $12.00. Our net aggregate proceeds (after underwriting discount
and expenses) amounted to approximately $54 million. The amount of the underwriting
discount paid by us in the initial public offering was approximately $4.2 million and the
expenses of the offering, not including the underwriting discount, were approximately $2.0
million, consisting of, among other things, SEC registration fees, NASD filings fees,
Nasdaq Global Select Market listing fees, Israel stamp duty and legal and accounting fees.
The payments of these expenses did not constitute direct or indirect payments to our
directors, officers, major shareholders or affiliates.

To
date, the net proceeds of the offering were invested in term deposits in U.S. banks,
government bonds and corporate bonds in accordance with our investment guidelines as
adopted by our audit committee. We still intend to use the proceeds in the manner set
forth in our prospectus of August 5, 2004.

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

(a)       
          We have evaluated the effectiveness of our disclosure controls and procedures as
          of December 31, 2008. Based on that evaluation, our Chief Executive Officer and
          Chief Financial Officer (the principal executive and principal financial
          officer, respectively) have concluded that we have in place effective controls
          and procedures designed to provide reasonable assurance that information
          required to be disclosed by us in the reports that we file or submit under the
          Securities Exchange Act of 1934, as amended, is accumulated and communicated to
          our management, including our principal executive officer and principal
          financial officer, or persons performing similar functions, as appropriate to
          allow timely decisions regarding required disclosure, and is recorded,
          processed, summarized and reported, within the time periods specified in the
          SECs rules and forms.

63

---

---

(b)       
          Our management, under the supervision of our Chief Executive Officer and Chief
          Financial Officer, is responsible for establishing and maintaining adequate
          internal control over our financial reporting, as defined in Rules 13a-15(f) and
          15d-15(f) of the Securities Exchange Act of 1934, as amended. The Companys
          internal control over financial reporting is a process designed to provide
          reasonable assurance regarding the reliability of financial reporting and the
          preparation of financial statements for external purposes in accordance with
          U.S. GAAP. Internal control over financial reporting includes policies and
          procedures that:

| |  | pertain
to the maintenance of records that in reasonable detail accurately and fairly
                  reflect our transactions and asset dispositions;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
reasonable assurance that transactions are recorded as necessary to permit the
preparation of our financial statements in accordance with generally accepted accounting
principles;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
reasonable assurance that receipts and expenditures are made only in accordance with
authorizations of our management and board of directors (as appropriate); and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
reasonable assurance regarding the prevention or timely detection of unauthorized
acquisition, use or disposition of assets that could have a material effect on our
financial statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Under
the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our
internal control over financial reporting as of December 31, 2008 based on the
framework for Internal Control-Integrated Framework set forth by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our
management concluded that the Companys internal controls over financial reporting
were effective as of December 31, 2008.

Our
independent registered public accounting firm, Kost, Forer, Gabbay & Kasierer an
independent registered public accounting firm and a member firm of Ernst & Young
Global has issued an attestation report on our internal controls over financial reporting,
and is incorporated herein by reference. There were no changes in our internal control
over financial reporting identified with the evaluation thereof that occurred during the
period covered by this Annual Report on Form 20-F that have materially affected, or are
reasonable likely to materially affect our internal control over financial reporting.

|ITEM 16A. |  | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- |  | --------------------------------

Our
board of directors has determined that Dr. Michael Anghel, who is an independent director
(as defined under Rule 4200(a)(15) of The Nasdaq Marketplace Rules) and serves on our
audit committee, qualifies as an audit committee financial expert as defined
in Item 16A of Form 20-F.

|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. In February 2008, the Code of Business Conduct
and Ethics was reapproved by our board of directors. The Code of Business Conduct and
Ethics is posted on our website, www.syneron.com.

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

During
the years 2007 and 2008, we were billed the following aggregate fees for the professional
services rendered by Ernst & Young, independent registered public accounting firm:

|                      | 2007
(in thousands) | 2008
(in thousands)
|--------------------- | ------------------- | -------------------
|
|
|
|
|Audit Fees(1)         |                     |                    
|Tax Fees(2)           |                     |                    
|Audit Related Fees(3) |                     |                    
|Total                 |                     |                    

|(1) | Audit
fees are fees for audit services for each of the years shown in this
               table, including fees associated with the annual audit (including audit of
our                internal control over financial reporting), consultations on various
accounting                issues and audit services provided in connection with other
statutory or                regulatory filings.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Tax
services rendered by our auditors were for tax compliance and for tax
               consulting associated with international transfer pricing.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Audit
related services rendered by Ernst & Young during 2008 were mostly in
               connection with due diligence review conducted with respect to potential
               acquisitions.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

64

---

---

Our
audit committee has adopted a policy for pre-approval of audit and non-audit services
provided by our independent auditor. Under the policy, such services must require the
specific pre-approval of our audit committee followed by ratification of our full board of
directors. Any proposed services exceeding the pre-approval amounts for all services to be
provided by our independent auditor require an additional specific pre-approval by our
audit committee.

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

Not
applicable.

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

Through
February 15, 2009, we spent an aggregate of $9.1 million to repurchase 588,700 ordinary
shares under our share repurchase program. The following table provides information
regarding our repurchases of our ordinary shares for each month included in the period
covered by this Annual Report on Form 20-F:

|Period                         | (a) Total Number
of Ordinary
Shares Purchased | (b) Average
Price Paid per
Ordinary Share | (c) Total Number of
Ordinary Shares
Purchased as Part
of
Publicly Announced
Plans or Programs | (d) Approximate
Dollar
Value of Shares
that
May Yet Be
Purchased
Under the Plans or
Programs (in
thousands)
|------------------------------ | --------------------------------------------- | ----------------------------------------- | --------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------
|
|
|
|
|November 1 - November 30, 2007 |                                               |                                           |                                                                                               | 209,000                                                                                                    
|December 1 - December 31, 2007 |                                               |                                           |                                                                                               | 257,000                                                                                                    
|March 1 - March 31, 2008       |                                               |                                           |                                                                                               | 122,700                                                                                                    

|ITEM 16F. |  | CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
|--------- |  | --------------------------------------------

Not
applicable.

|ITEM 16G. |  | CORPORATE GOVERNANCE
|--------- |  | --------------------

Not
applicable.

# PART III

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

Not
applicable.

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

Our,
and our subsidiarys Consolidated Financial Statements beginning on pages F-1 through
F-52, as set forth in the following index, are hereby incorporated herein by reference.
These Consolidated Financial Statements are filed as part of this Annual Report on Form
20-F.

|                                                                                                     |          
|---------------------------------------------------------------------------------------------------- | ---------
|
|
|
|
|Report of Independent Registered Public Accounting Firm                                              | F-2      
|Report of Independent Registered Public Accounting Firm On Internal Control Over Financial Reporting | F-3      
|Consolidated Balance Sheets                                                                          | F-4 F-5  
|Consolidated Statements of Income                                                                    | F-6      
|Consolidated Statements of Changes in Shareholders' Equity                                           | F-7-F-9  
|Consolidated Statements of Cash Flows                                                                | F-10-F-11
|Notes to Consolidated Financial Statements                                                           | F-12-F-52

65

---

---

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

|1.1 |  | Articles
of Association of Registrant, as amended (incorporated by reference to Exhibit 1.1 to our
Annual Report on Form 20-F for the year ended December 31, 2007, filed May 7, 2008).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.1 |  | Form
of Share Certificate (incorporated by reference to Exhibit 4.1 to our Registration
Statement on Form F-1 filed July 14, 2004).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------

|4.1 |  | Turn-Key
Manufacturing Agreement by and between Syneron Medical Ltd. and U.S.R.
              Electronics Systems (1987) Ltd. (incorporated by reference to Exhibit 10.2
to our               Registration Statement on Form F-1/A filed August 3, 2004)^.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Turn-Key
Manufacturing Agreement by and between Syneron Medical Ltd. and Fibernet Ltd.
              (incorporated by reference to Exhibit 10.3 to our Registration Statement on
Form F-1/A               filed August 3, 2004)^.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Patent License and Settlement
Agreement dated March 4, 2004 by and between (a) Lumenis Inc. and Lumenis Ltd. and (b)
Syneron Inc. and Syneron Medical Ltd. (incorporated by reference to Exhibit 10.4 to our
Registration Statement on Form F-1/A filed August 3, 2004)^.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | 2003
Stock Option Plan (incorporated by reference to Exhibit 10.5 to our Registration
Statement on Form F-1 filed July 14, 2004).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | 2004
Israel Stock Option Plan (incorporated by reference to Exhibit 10.6 to our Registration
Statement on Form F-1 filed July 14, 2004).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | 2004
United States and Canada Stock Option Plan (incorporated by reference to Exhibit 10.7 to
our Registration Statement on Form F-1 filed July 14, 2004).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | 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 filed July 30, 2005).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | Joint
Development and Supply Framework Agreement dated as of February 25, 2007 by and between
The Procter & Gamble Company and Syneron Medical Ltd. (incorporated by reference to
Exhibit 4.9 to our Annual Report on Form 20-F for the year ended December 31, 2006 filed
June 15, 2007)^.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | Shareholders Rights
Agreement dated as of November 11, 2008 by and between Syneron Medical Ltd. and American
Stock Transfer & Trust Company, LLC (incorporated by reference to Exhibit 99.1 to our
Report of Foreign Private Issuer on Form 6-K, filed November 12, 2008)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1* |  | List
of Subsidiaries of the Registrant.
|---- |  | ---------------------------------------

|12.(a).1* |  | Certification
of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12.(a).2* |  | Certification
of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13.(a).1* |  | Certifications
of the Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15.(a).1* |  | Consent
of Independent Registered Public Accounting Firm.
|--------- |  | ---------------------------------------------------------

---

|* | Filed
herewith.
|- | ---------------

|^ | Portions
of this exhibit have been omitted and filed separately with the secretary of the
Securities and Exchange Commission pursuant to a confidential treatment request
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

66

---

---

SYNERON MEDICAL LIMITED
AND ITS SUBSIDIARIES

Consolidated Financial Statements

As of December 31, 2008

In U.S. Dollars



---

---

SYNERON MEDICAL LIMITED AND
ITS SUBSIDIARIES

Consolidated Financial Statements As of December 31, 2008

In Thousands of U.S.
Dollars

C O N T E N T S

|                                                                                                     | P a g e        
|---------------------------------------------------------------------------------------------------- | ---------------
|
|
|
|
|Report Of Independent Registered Public Accounting Firm                                              | F - 2          
|                                                                                                    
|Report of Independent Registered Public Accounting Firm On Internal Control Over Financial Reporting | F - 3          
|                                                                                                    
|Consolidated Balance Sheets                                                                          | F - 4 - F - 5  
|                                                                                                    
|Consolidated Statements of Income                                                                    | F - 6          
|                                                                                                    
|Statements of Changes in Shareholder's Equity                                                        | F - 7 - F - 9  
|                                                                                                    
|Consolidated Statements of Cash Flows                                                                | F - 10 - F - 11
|                                                                                                    
|Notes to the Consolidated Financial Statements                                                       | F - 12 - F - 52

F - 1

---

---

| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
|
|
|
|
| | Kost Forer Gabbay & Kasierer 2 Pal-Yam Ave.Haifa 33095, IsraelTel: 972 (4)8654000Fax: 972 (3)5633443www.ey.com.il

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of
Directors and Shareholders of

SYNERON MEDICAL LTD.

We
have audited the accompanying consolidated balance sheets of Syneron Medical Ltd. (the
Company) and its subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of income, changes in shareholders equity and cash
flows for each of the three years in the period ended December 31, 2008. These
consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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, 2008 and 2007, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December
31, 2008, in conformity with U.S. generally accepted accounting principles.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 23, 2009 expressed an unqualified opinion
thereon.

|               |                                 
|-------------- | --------------------------------
|
|
|
|
|Haifa, Israel  | KOST FORER GABBAY & KASIERER    
|March 24, 2009 | A Member of Ernst & Young Global

F - 2

---

---

| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
|
|
|
|
| | Kost Forer Gabbay & Kasierer 2 Pal-Yam Ave.Haifa 33095, IsraelTel: 972 (4)8654000Fax: 972 (3)5633443www.ey.com.il

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM  ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of
Directors and Shareholders of

SYNERON MEDICAL LTD.

We
have audited Syneron Medical Ltd.s (the Company) internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). The Companys management is
responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting included
in the accompanying Form 20-F. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

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

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

In
our opinion, the Company maintained in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Syneron Medical Ltd.
and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements
of income, changes in shareholders equity and cash flows for each of the three years
in the period ended December 31, 2008 and our report dated March 24, 2009 expressed
an unqualified opinion thereon.

|               |                                 
|-------------- | --------------------------------
|
|
|
|
|Haifa, Israel  | KOST FORER GABBAY & KASIERER    
|March 24, 2009 | A Member of Ernst & Young Global

F - 3

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|CONSOLIDATED
BALANCE SHEETS
|---------------------------

---

|U.S.
dollars in thousands
|-------------------------

|                                                                    |  | December 31,
|------------------------------------------------------------------- |  | ------------
|
|
|
|
|ASSETS                                                              |  |             
|                                                                    |  |             
|CURRENT ASSETS:                                                     |  |             
|Cash and cash equivalents                                           |  |             
|Available-for-sale marketable securities                            |  |             
|Trade receivables (net of allowance for doubtful accounts of $5,876 |  |             
|and $1,777 as of December 31, 2008 and 2007, respectively)          |  |             
|Other accounts receivable and prepaid expenses                      |  |             
|Inventories                                                         |  |             
|                                                                    |  |             
|                                                                    |  |             
|Total Current Assets                                                |  |             
|                                                                    |  |             
|                                                                    |  |             
|LONG-TERM ASSETS:                                                   |  |             
|Severance pay fund                                                  |  |             
|Long-term deposits and others                                       |  |             
|Long-term available-for-sale marketable securities                  |  |             
|Investments in affiliated companies                                 |  |             
|Property and equipment, net                                         |  |             
|Intangible assets, net                                              |  |             
|Goodwill                                                            |  |             
|                                                                    |  |             
|                                                                    |  |             
|Total Long-Term Assets                                              |  |             
|                                                                    |  |             
|                                                                    |  |             
|Total Assets                                                        |  |             
|                                                                    |  |             

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

F - 4

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|CONSOLIDATED BALANCE SHEETS
|---------------------------

---

|U.S. dollars in thousands, except share and per share data
|----------------------------------------------------------

|                                                                   |  | December 31,
|------------------------------------------------------------------ |  | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                               |  |             
|                                                                   |  |             
|CURRENT LIABILITIES:                                               |  |             
|Trade payables                                                     |  |             
|Other accounts payable and accrued expenses                        |  |             
|                                                                   |  |             
|                                                                   |  |             
|Total Current Liabilities                                          |  |             
|                                                                   |  |             
|                                                                   |  |             
|LONG-TERM LIABILITIES:                                             |  |             
|Deferred revenues                                                  |  |             
|Warranty accruals                                                  |  |             
|Accrued severance pay                                              |  |             
|                                                                   |  |             
|                                                                   |  |             
|Total Long-Term Liabilities                                        |  |             
|                                                                   |  |             
|                                                                   |  |             
|Total Liabilities                                                  |  |             
|                                                                   |  |             
|                                                                   |  |             
|SHAREHOLDERS' EQUITY:                                              |  |             
|Ordinary shares of NIS 0.01 par value:                             |  |             
|Authorized - 100,000,000 Ordinary shares; Issued and outstanding - |  |             
|27,472,775 and  27,375,010 shares as of December 31, 2008 and      |  |             
|2007, respectively                                                 |  |             
|Additional paid-in capital                                         |  |             
|Treasury shares - 1,251,574 and 1,128,874 Ordinary shares as of    |  |             
|December 31, 2008 and 2007, respectively                           |  |             
|Accumulated other comprehensive loss                               |  |             
|Retained earnings                                                  |  |             
|                                                                   |  |             
|                                                                   |  |             
|Total Shareholders' Equity                                         |  |             
|                                                                   |  |             
|                                                                   |  |             
|Total Liabilities and Shareholders' Equity                         |  |             
|                                                                   |  |             

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

F - 5

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|CONSOLIDATED STATEMENTS OF INCOME
|---------------------------------

---

|U.S. dollars in thousands, except share and per share data
|----------------------------------------------------------

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

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

F - 6

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|---------------------------------------------

---

|U.S. dollars in thousands
|-------------------------

|                                                       | Ordinary
Shares | Additional
Paid-in
Capital | Accumulated
Other
Comprehensive
loss **) | Treasury
Shares | Retained
Earnings | Total
Shareholders'
Equity | Total
Comprehensive
Income
|------------------------------------------------------ | --------------- | -------------------------- | ---------------------------------------- | --------------- | ----------------- | -------------------------- | --------------------------
|
|
|
|
|Balance as of January 1, 2008                          |                 |                            | $                                        | 64              |                   | $                          | 89,941                    
|Exercise of stock options                              |                 |                            |                                          | *)              |                   |                            | 2                         
|Issuance of shares as a result                         |                 |                           
|of exercise of  restricted stock units (RSU)           |                 |                            |                                          | *)              |                   |                            | 2                         
|Equity based compensation expenses                     |                 |                            |                                          | -               |                   |                            | 7,592                     
|Repurchase of Ordinary shares at cost                  |                 |                            |                                          | -               |                   |                            | -                         
|Accretion to redemption of value of put option         |                 |                           
|(see also Note 1C)                                     |                 |                            |                                          | -               |                   |                            | -                         
|Reimbursement of share issuance expenses               |                 |                           
|(see also Note 14A(7))                                 |                 |                            |                                          | -               |                   |                            | 588                       
|Other comprehensive income:                            |                 |                           
|Unrealized loss on available-for-sale securities       |                 |                            |                                          | -               |                   |                            | -                         
|Reclassification to income statement for loss realized |                 |                            |                                          | -               |                   |                            | -                         
|Net income                                             |                 |                            |                                          | -               |                   |                            | -                         
|                                                       |                 |                            |                                          |                 |                   |                            |                           
|                                                       |                 |                           
|Total comprehensive income                             |                 |                            |                                          |                 |                   |                            |                           
|                                                       |                 |                            |                                          |                 |                   |                            |                           
|                                                       |                 |                           
|Balance as of December 31, 2008                        |                 |                            | $                                        | 64              |                   | $                          | 98,125                    
|                                                       |                 |                            |                                          |                 |                   |                            |                           

|*) | Less
than $1
|-- | ------------

|**) | Accumulated
other comprehensive loss on account of unrealized losses on
                    available-for-sale marketable securities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

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

F - 7

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|STATEMENTS OF CHANGES IN SHARHOLDERS' EQUITY
|--------------------------------------------

---

|U.S.
dollars in thousands
|-------------------------

|                                                                           | Ordinary
Shares | Additional
Paid-in
Capital | Accumulated
Other
Comprehensive
loss **) | Treasury
Shares | Retained
Earnings | Total
Shareholders
Equity | Total
Comprehensive
Income
|-------------------------------------------------------------------------- | --------------- | -------------------------- | ---------------------------------------- | --------------- | ----------------- | -------------------------- | --------------------------
|
|
|
|
|Balance as of January 1, 2007                                              |                 |                            | $                                        | 63              |                   | $                          | 78,663                    
|Exercise of stock options                                                  |                 |                            |                                          | 1               |                   |                            | 3,468                     
|Issuance of shares as a result of exercise of restricted stock units (RSU) |                 |                            |                                          | *)              |                   |                            | 1                         
|Equity based compensation expenses                                         |                 |                            |                                          | -               |                   |                            | 7,809                     
|Repurchase of Ordinary shares at cost                                      |                 |                            |                                          | -               |                   |                            | -                         
|Other comprehensive income:                                                |                 |                           
|Unrealized gain on available-for-sale securities                           |                 |                            |                                          | -               |                   |                            | -                         
|Reclassification to income statement for gain realized                     |                 |                            |                                          | -               |                   |                            | -                         
|Net income                                                                 |                 |                            |                                          | -               |                   |                            | -                         
|                                                                           |                 |                            |                                          |                 |                   |                            |                           
|                                                                           |                 |                           
|Total comprehensive income                                                 |                 |                            |                                          |                 |                   |                            |                           
|                                                                           |                 |                            |                                          |                 |                   |                            |                           
|                                                                           |                 |                           
|Balance as of December 31, 2007                                            |                 |                            | $                                        | 64              |                   | $                          | 89,941                    
|                                                                           |                 |                            |                                          |                 |                   |                            |                           

|*) | Less
than $1.
|-- | -------------

|**) | Accumulated
other comprehensive loss on account of unrealized losses on           available-for-sale
marketable securities.
|--- | ---------------------------------------------------------------------------------------------------------------------------

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

F - 8

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|STATEMENTS OF CHANGES IN SHARHOLDERS' EQUITY
|--------------------------------------------

---

|U.S.
dollars in thousands
|-------------------------

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

|*) | Accumulated
other comprehensive loss on account of unrealized losses on           available-for-sale
marketable securities.
|-- | ---------------------------------------------------------------------------------------------------------------------------

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

F - 9

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|CONSOLIDATED STATEMENTS OF CASH FLOWS
|-------------------------------------

---

|U.S.
dollars in thousands
|-------------------------

|                                                                                  | Year Ended December 31,
|--------------------------------------------------------------------------------- | -----------------------
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |                        
|Net income                                                                        |                        
|Adjustments to reconcile net income to net cash provided by operating activities: |                        
|Depreciation and amortization                                                     |                        
|Deferred taxes                                                                    |                        
|Increase (decrease) in accrued severance pay, net                                 |                        
|Decrease (increase) in trade receivables, net                                     |                        
|Decrease  in other accounts receivable and prepaid expenses                       |                        
|Increase in inventories                                                           |                        
|Increase in trade payables                                                        |                        
|Increase (decrease) in other account payable and accrued expenses                 |                        
|Impairment of available-for-sale marketable securities                            |                        
|Realized loss (gain) and changes in accrued interest from marketable securities   |                        
|Equity based compensation                                                         |                        
|Increase (decrease) in deferred revenues                                          |                        
|Increase (decrease) in warranty accruals                                          |                        
|Loss on sales of property and equipment                                           |                        
|                                                                                  |                        
|                                                                                  |                        
|Net cash provided by operating activities                                         |                        
|                                                                                  |                        
|                                                                                  |                        
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |                        
|Maturity of (investment in) short-term deposits, net                              |                        
|Purchase of available-for-sale marketable securities                              |                        
|Proceeds from sale and redemption of available-for-sale marketable securities     |                        
|Payments for investments in affiliated companies                                  |                        
|Investment in long -term deposits and others                                      |                        
|Purchase of property and equipment                                                |                        
|Purchase of intangible assets                                                     |                        
|Acquisition of minority shares in a subsidiary (Schedule A)                       |                        
|Proceeds from sale of property and equipment                                      |                        
|Net cash paid in conjunction with acquisition of a subsidiary (Schedule B)        |                        
|                                                                                  |                        
|                                                                                  |                        
|Net cash provided by (used in) investing activities                               |                        
|                                                                                  |                        
|                                                                                  |                        
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |                        
|Exercise of stock options                                                         |                        
|Issuance of shares as a result of exercise of RSUs                                |                        
|Repurchase of Ordinary shares from shareholders at cost                           |                        
|Reimbursement of share issuance expenses                                          |                        
|                                                                                  |                        
|                                                                                  |                        
|Net cash provided by (used in) financing activities                               |                        
|                                                                                  |                        
|                                                                                  |                        
|Increase in cash and cash equivalents                                             |                        
|Cash and cash equivalents at the beginning of the year                            |                        
|                                                                                  |                        
|                                                                                  |                        
|Cash and cash equivalents at the end of the year                                  |                        
|                                                                                  |                        
|                                                                                  |                        
|Supplemental disclosure of cash flow information:                                 |                        
|Cash paid during the year for:                                                    |                        
|Income taxes                                                                      |                        
|                                                                                  |                        

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

F - 10

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|CONSOLIDATED STATEMENTS OF CASH FLOWS
|-------------------------------------

---

|U.S.
dollars in thousands
|-------------------------

|                                                                                    | Year Ended December 31,
|----------------------------------------------------------------------------------- | -----------------------
|
|
|
|
|Supplemental disclosure of non cash financing and investing activities:             |                        
|                                                                                    |                        
|Purchase of property and equipment in credit                                        |                        
|                                                                                    |                        
|Change in designation of Inventory to property and equipment                        |                        
|                                                                                    |                        
|Acquisition of minority shares in a subsidiary by credit                            |                        
|                                                                                    |                        
|                                                                                    |                        
|SCHEDULE A:                                                                         |                        
|Acquisition of minority shares in a subsidiary (see Note 1(C))                      |                        
|                                                                                    |                        
|Estimated net fair value of assets acquired and liabilities assumed at the  date of |                        
|acquisition was as follows:                                                         |                        
|                                                                                    |                        
|Goodwill and other intangible assets                                                |                        
|In Process Research and Development                                                 |                        
|                                                                                    |                        
|Total identified assets acquired                                                    |                        
|                                                                                    |                        
|Amount payable                                                                      |                        
|                                                                                    |                        
|Amounts paid during the year                                                        |                        
|                                                                                    |                        
|                                                                                    |                        
|                                                                                    |                        
|                                                                                    |                        
|SCHEDULE B:                                                                         |                        
|Net cash paid in conjunction with acquisition of subsidiary (see Note 1(D))         |                        
|                                                                                    |                        
|Contingent Payment Liability                                                        |                        
|Developed Technology                                                                |                        
|Deferred Tax Liability                                                              |                        
|                                                                                    |                        
|                                                                                    |                        
|Net cash paid for acquisition                                                       |                        
|                                                                                    |                        

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

F - 11

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

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

| | A. | Syneron Medical Ltd. (the
Company or Syneron) commenced its operations in July 2000. The Company
and its subsidiaries (together the Group) are principally engaged in research,
development, marketing and sales, directly to end-users and also to distributors of
advanced equipment for the esthetic medical industry and systems for dermatologists,
plastic surgeons and other qualified practitioners worldwide.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Syneron GmbH, a wholly-owned
subsidiary in Germany, was established in August 2001, for the purpose of marketing and
selling of the Companys products in Europe. Syneron Inc. and Syneron Canada Corp.,
also wholly-owned subsidiaries, were established during 2002 for the purpose of marketing
and selling 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 in
promoting, marketing and serving as an agent of the Company in Asia and Australia in
January 2007.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Light
Instruments Ltd:
| | -- | ----------------------

| | In
2005, the Company invested in Light Instruments Ltd. (LI), an Israeli
development stage company engaged in the development of advanced dental laser devices.
The Company invested $1,500, in two portions, in consideration for approximately 51% of
is outstanding share capital and exercised its right to increase the number of directors
to three out of five members of LIs board of directors. As such, the Company is
consolidating LI since the third quarter of 2005. The Company is expecting to utilize LIs
technology to develop and release additional products.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 2, 2007, the Company signed a new share purchase agreement with LI and its two
founders. The Company has recorded an investment at the total amount of $4,340 in
consideration for approximately 44% of LIs outstanding share capital. Following the
closing, the Company held approximately 95% of LI. As of December 31, 2007, the Company
had paid in cash $3,554 and recorded a liability to pay an additional $786 to the two
founders. During 2008, the Company paid $219 on account of the above mentioned liability.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Each
of the two founders is also entitled to 0.5% of all of LI is net sales for a period of up
to seven years starting from the closing date, up to an aggregate amount of $500 with no
regard to their continuous employment by the Company (i.e., the founders are entitled to
such amounts as sellers and not in their role as employees). This amount will be recorded
as part of the purchase price and will be allocated to goodwill.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Founders and the Company have a put and call option for the respective sale and
acquisition of the remaining 5% holdings for the sum of $500, with various effective
dates, last of which was July 2, 2017.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In 2008, the founders exercised their put option. As a result of the exercise of the put
option, the Company accreted to the redemption value of the put option and recorded such
accretion to its retained earnings in the amount of $138. The Company recorded the amount
paid for the remaining 5% as an increase to its goodwill resulting from the LI
acquisition. As of October 2008, the Company holds 100% of LI.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 1 |  | GENERAL (CONT.)
|------ | - | ---------------

| | C. | Light
Instruments Ltd (Cont.):
| | -- | ------------------------------

| | If
the two founders comply with certain terms with respect to the termination of their
employment, they shall be entitled to receive an aggregate amount of $350 over a period
of 3 years. Since the foundersentitlement to such compensation is contingent upon
their continuous service to the acquired company, such amounts are recognized as
compensation expense in the appropriate periods in which the founders are providing
services to the acquired company as employees.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has accounted for this share purchase agreement according to SFAS No. 141,
Business Combinations.
| | ---------------------------------------------------------------------------------------------------------------

| | The
purchase price was allocated based on an independent third party appraisal.
| | -------------------------------------------------------------------------------

| | The
excess of the amounts paid through December 31, 2008 for the above mentioned LI shares
acquired over their book value was attributed as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |                                     | Excess cost | Expected useful lives
of excess cost
| | ----------------------------------- | ----------- | ------------------------------------
|
|
|
|
| | Developed technology                |             |                                     
| | In Process Research and Development |             |                                     
| | Distribution agreements             |             |                                     
| | Brand name                          |             |                                     
| | Goodwill(*), (**)                   |             |                                     
| |                                     |             |                                     
| |                                     |             |                                     
| |                                     |             |                                     

| | (*) | Including
$56 paid to the two founders in connection with LI net sales amounts, see
above.
| | --- | ------------------------------------------------------------------------------------------

| | (**) | Including
$500 paid in connection with put option exercised, see above.
| | ---- | -----------------------------------------------------------------------

| | D. | Inlight
Corp.
| | -- | -------------

| | 1. | In
November 2008, the Company entered into a share purchase agreement           (SPA)
with Inlight Corp. (Inlight), a company           incorporated under the laws
of the State of California pursuant to which Syneron           acquired all of Inlights
share capital. The Company is expecting to           utilize Inlights technology to
develop and release additional products.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
consideration for Inlights share capital, the Company undertook to pay           a
total consideration of up to $4,000. The consideration is conditioned upon
          Inlights compliance with certain milestones detailed in the SPA. At the
          closing, the Company paid Inlights shareholders a total consideration of
          $500 and deposited an additional amount of $500 in escrow. Amounts deposited in
          escrow were recorded as part of other receivables.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 1 |  | GENERAL (CONT.)
|------ | - | ---------------

| | D. | Inlight
Corp. (Cont.)
| | -- | ---------------------

| | 3. | The
Company has accounted for the acquisition in accordance with SFAS141,           Business
Combinations. The purchase price was allocated based on           independent third
party appraisal. The excess amounts paid for above mentioned           shares acquired
over their book value was attributed as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Assets                       | Fair Value | Expected useful lives
of excess cost
| | ---------------------------- | ---------- | ------------------------------------
|
|
|
|
| | Tangible Asset               |            |                                     
| | Contingent Payment Liability |            |                                     
| |                              |            |                                     
| | Intangible Assets            |            |                                     
| | Developed Technology         |            |                                     
| | Deferred tax liability       |            |                                     
| |                              |            |                                     
| | Total Purchase Price         |            |                                     
| |                              |            |                                     

| | E. | Syneron
China
| | -- | -------------

| | During November 2008, the Company
signed a joint venture (JV) agreement for establishing Syneron China.
According to the agreement the Company will hold 51% of the JV for the total investment of
$510. Through this new Chinese subsidiary, Syneron will sell directly to medical and
aesthetic professionals in China. As of December 31, 2008, the JV has not yet been
incorporated and is expected to commence its operations during 2009.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 U.S. generally accepted accounting
principles requires management to make estimates, judgments and assumptions. The Companys
management believes that the estimates, judgments and assumptions used are reasonable
based upon information available at the time they are made. These estimates, judgments
and assumptions can affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the dates of the financial statements, and the
reported amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Companys consolidated revenues are generated mainly in U.S. dollars (dollars).
In addition, a substantial portion of the Groups costs are incurred in dollars. The
Companys management believes that the dollar is the primary currency of the
economic environment in which the Company and its subsidiaries operate. Thus, the dollar
is the functional and reporting currency of the Company and its subsidiaries. Transaction
and balances in currencies other than the US dollars have been re-measured into dollars
in accordance with the principles set forth in Statement of Financial Accounting
Standards 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 2 |  | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|------ | - | ---------------------------------------

| | 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
EQUIVALENTS
| | -- | ----------------

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

| | E. | MARKETABLE
SECURITIES
| | -- | ---------------------

| | Management
determines the appropriate classification of its investments in marketable debt
securities at the time of purchase and re-evaluates such designations as of each balance
sheet date. During 2008, 2007 and 2006, all marketable securities covered by Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities, were designated as available-for-sale.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
these securities are stated at fair value, with unrealized gains and losses reported in
accumulated other comprehensive loss, a separate component of shareholders equity,
net of taxes. Realized gains and losses on sales of investments, and impairment of
investments, as determined on a specific identification basis, are included in the
consolidated statement of operations. Interest and amortization of premium and discount
on debt securities are recorded as financial income, net.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FASB
Staff Position (FSP) No. 115-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investment (FSP 115-1) and
SAB Topic 5M, Other Than Temporary Impairment Of Certain Investments In Debt And
Equity Securities, provide guidance for determining when an investment is
considered impaired, whether impairment is other than temporary, and measurement of an
impairment loss. An investment is considered impaired if the fair value of the investment
is less than its carrying amount. The Company considers various factors in determining
whether to recognize an impairment charge, including the Companys intent and
ability to hold the investment for a period of time sufficient to allow for any
anticipated recovery in market value, the length of time and extent to which the fair
value has been less than the cost basis, the credit ratings of the securities and the
financial condition and near-term prospects of the issuers. If, after consideration of
all available evidence to evaluate the realizable value of its investment, impairment is
determined to be other than temporary, then an impairment loss should be recognized equal
to the difference between the investments carrying amount and its fair value.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | DERIVATIVES
| | -- | -----------

| | The
Companys Derivatives are not designated as hedging instruments under SFAS 133.
Those derivatives consist primarily of forward contracts the Company uses to hedge
foreign currency balance sheet exposures. Since the derivative instruments are not
designated as hedging instruments under SFAS 133, the Company recognizes changes in the
fair values in its statement of income in financial income, net, in the same period as
the remeasurement gain and loss of the related foreign currency denominated assets and
liabilities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 2 |  | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|------ | - | ---------------------------------------

| | G. | INVENTORIES
| | -- | -----------

| | Inventories
are stated at the lower of cost or market value. Inventory write-offs are provided for
slow-moving items.
| | ---------------------------------------------------------------------------------------------------------------------

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

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

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

| | Inventory
provisions are provided to cover risks arising from slow-moving items and discontinued
products. Inventory provisions for the years ended December 31, 2008, 2007 and 2006 were
$1,478, $1,318 and $0, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 | 10-33 (mainly 33)                      
| | laboratory equipment                  
| | Office furniture, equipment            | 7-15 (mainly 15)                       
| | Leasehold improvements                 | The shorter of term of the lease or the
| |                                        | useful life of the asset               

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

| | The
Companys long-lived assets and identifiable intangibles subject to amortization 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 2008, 2007 and 2006, no impairments losses have been
identified.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | INVESTMENTS
IN AFFILATED COMPANIES
| | -- | ----------------------------------

| | All
investments in Affiliates are stated at cost. The Company followed EITF 02-14,Whether
an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common
Stock, with regard to certain investments in Preferred shares, and determined that
they are not in substance Common stock.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 2 |  | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|------ | - | ---------------------------------------

| | J. | INVESTMENTS
IN AFFILATED COMPANIES (CONT.)
| | -- | ------------------------------------------

| | The
Companys investment in the affiliated companies is reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an investment may
not be recoverable, in accordance with Accounting Principle Board Opinion No. 18, The
Equity Method of Accounting for Investments in Common Stock (APB No. 18)
and FASB Staff Position (FSP) No. 115-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investment (FSP
115-1). As of December 31, 2008, based on managements most recent analysis,
no impairment losses have been identified.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | K. | GOODWILL
AND INTANGIBLE ASSETS
| | -- | ------------------------------

| | Goodwill
and intangible assets have been recorded as a result of an acquisition. Goodwill
represents the excess of the purchase price in a business combination over the fair value
of net tangible and intangible assets acquired.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). Under SFAS No. 142, goodwill is not amortized but instead is
tested for impairment at least annually (or more frequently if impairment indicators
arise). The Company determined June 30 as the date of the annual impairment test.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 142 prescribes a two-phase process for impairment testing of goodwill. The first
phase screens for impairment while the second phase (if necessary) measures impairment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the first phase of impairment testing, goodwill attributable to the reporting units is
tested for impairment by comparing the fair value of the reporting unit with its carrying
value. The Company performs an annual impairment test or more frequently if impairment
indicators are present. The Company operates in one operating and reportable segment. As
of December 31, 2008, no instances of impairment were found.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Intangible
assets are stated at cost, net of accumulated amortization. Intangible Assets are
amortized over their useful lives using a method of amortization that reflects the
pattern in which the economic benefits of the intangible assets are consumed or otherwise
used up, in accordance with SFAS No. 144. The Company amortizes its intangible assets on
a straight line basis. During 2008, 2007 and 2006, no impairment loss was recorded.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company and its subsidiaries generate revenues mainly from product sales. The Company
also generates revenues in a lesser extent 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, collectability is probable and no further obligations
exist. The Company does not grant a right of return for its products.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 2 |  | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|------ | - | ---------------------------------------

| | L. | REVENUE
RECOGNITION (CONT.)
| | -- | ---------------------------

| | Other
than pricing terms which may differ due to the different volume of purchases between
distributors and end-users, there are no material differences in the terms and
arrangements involving direct and indirect customers.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
of the Companys products sold through agreements with distributors are
non-exchangeable, non-refundable, non-returnable and without any rights of price
protection or stock rotation. Accordingly, the Company considers all the distributors as
end-users.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
revenue includes unearned amounts received in respect of service contracts and amounts
received from customers but not yet recognized as revenues.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

| | At
December 31, 2008, the Company has 2 stock-based employee compensation plans, which are
described more fully in Note 14. Prior to January 1, 2006, the Company accounted for
those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25), and related Interpretations, as
permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement
123). Under APB 25, compensation expense was measured based on the intrinsic value
of the options granted at the grant date or other measurement date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS 123(R)) which requires
the measurement and recognition of compensation expense based on estimated fair values
for all share-based payment awards made to employees and directors. SFAS 123(R)
supersedes APB 25, under which the Company previously accounted for its share based
awards granted to employees and directors, for periods beginning in fiscal 2006. In March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB
107) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in
its adoption of SFAS 123(R).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

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---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 2 |  | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|------ | - | ---------------------------------------

| | N. | STOCK-BASED
COMPENSATION (CONT.)
| | -- | --------------------------------

| | SFAS
123(R) requires companies to estimate the fair value of equity-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the requisite
service periods in the Companys consolidated income statement. Prior to the
adoption of SFAS 123(R), the Company accounted for equity-based awards to employees and
directors using the intrinsic value method in accordance with APB 25 as 123.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard starting from January 1, 2006, the
first day of the Companys fiscal year 2006. Under that transition method,
compensation costs recognized in 2006, 2007and 2008, include: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original provisions
of SFAS 123, and (b) compensation cost for all share-based payments granted starting from
January 1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of Statement 123(R). Results for prior periods have not been restated.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expenses for the value of its awards based on the
straight line method over the requisite service period of each of the awards, net of
estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting
forfeitures.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | The
carrying amounts of financial instruments, including cash and cash equivalents,
short-term deposits, marketable securities, accounts receivable, accounts payable and
accrued liabilities, approximate fair value because of their generally short maturities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective January 1, 2008, the
Company adopted SFAS 157, Fair Value Measurement, and effective
October 10, 2008, adopted FSP No. SFAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, except as it applies
to the nonfinancial assets and nonfinancial liabilities subject to FSP 157-2,
Effective Date of FASB Statement No. 157". SFAS 157 clarifies that fair value
is an exit price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants. As such,
fair value is a market-based measurement that should be determined based on assumptions
that market participants would use in pricing an asset or a liability. As a basis for
considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which
prioritizes the inputs used in the valuation methodologies in measuring fair value:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 2 |  | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|------ | - | ---------------------------------------

| | P. | FAIR
VALUE OF FINANCIAL INSTRUMENTS (CONT.)
| | -- | -------------------------------------------

| | Level 1-
Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
| | -------------------------------------------------------------------------------------------------------------------------

| | Level 2
 Include other inputs that are directly or indirectly observable in the marketplace.
| | ---------------------------------------------------------------------------------------------

| | Level 3
Unobservable inputs which are supported by little or no market activity.
| | ---------------------------------------------------------------------------------

| | The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Q. | INCOME
TAXES
| | -- | ------------

| | The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes (SFAS No. 109). SFAS No. 109 prescribes the use of the
liability method whereby deferred tax asset and liability account balances are determined
based on differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to amounts more likely than not to be realized.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
tax liabilities and assets are classified as current or non current based on the
classification of the related asset or liability for financial reporting, or according to
the expected reversal dates of the specific temporary differences if not related to an
asset or liability for financial reporting.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is to evaluate
the tax position taken or expected to be taken in a tax return by determining if the
weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes. The second step is
to measure the tax benefit as the largest amount that is more than 50% (cumulative
probability) likely to be realized upon ultimate settlement. The Company accrues interest
and penalties related to unrecognized tax benefits in its provision for income tax.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 2 |  | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|------ | - | ---------------------------------------

| | 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 surrendered value of these policies, and includes immaterial profits
accumulated up to balance sheet dates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
expenses for the years ended December 31, 2008, 2007 and 2006 amounted to approximately
$761, $505 and $266, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | S. | ADVERTISING
EXPENSES
| | -- | --------------------

| | Advertising
expenses are charged to the statements of income, as incurred. Advertising expenses for
the years ended December 31, 2008, 2007 and 2006 were $2,672, $2,644 and $2,019,
respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, low credit risk exists with respect to these investments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys marketable securities include investments in highly rated debentures of
Israeli, U.S, and Scotch Corporations and Governmental Bonds. Based on the above and the
fact that the portfolio is well diversified, management believes that low credit risk
exists with respect to these marketable securities. As a result of the recent turmoil in
capital markets, the Company has implemented additional measures with respect to its
investment policy. Such measures included among others: reducing credit exposure to
corporate sector securities and increasing the overall credit quality of the portfolio.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Companys trade receivables are derived from sales to large independent distributors
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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 2 |  | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|------ | - | ---------------------------------------

| | T. | CONCENTRATION
OF CREDIT RISK (CONT.)
| | -- | ------------------------------------

| | The
following table provides the detail of the change in the Company provision for doubtful
debts for the years ended December 31, 2008, 2007 and 2006:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | U. | CONCENTRATION
OF OPERATIONAL RISK
| | -- | ---------------------------------

| | The
Company outsources the manufacturing of its products to three subcontractors located in
Israel. These subcontractors have limited manufacturing capacity that may be inadequate
if customers place orders for unexpectedly large quantities of products. In addition,
because the Companys subcontractors are located in Israel, they on occasion may
feel the impact of potential economic or political instability in the region. If the
operations of one or more of these subcontractors were halted or limited, even
temporarily, or if they were unable or unwilling to fulfill large orders, the Company
could experience business interruption, increased costs, damage to the Companys
reputation and loss of customers. In addition, qualifying new subcontractors could take
several months. Management believes that the above mentioned risk is mitigated by
diversification of production where each product is manufactured by more than one
subcontractor. In addition, most of the subcontractors are affiliated with international
firms and if needed a temporary solution could be found by shifting manufacturing out of
Israel.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Many
of the components that comprise the Companys products are currently manufactured by
a limited number of suppliers. Although most of the components are obtained from at least
three separate suppliers, the Company does not have the ability to manufacture these
components. A supply interruption or an increase in demand beyond current suppliers capabilities
could harm the Companys ability to manufacture its products until it identifies and
qualifies a new source of supply, which could take several months.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Any
interruption in the supply of components or materials, or the Companys inability to
obtain substitute components or materials from alternate sources at acceptable prices in
a timely manner, could impair the ability to meet the demand of the Companys
customers, which would have an adverse effect on the Companys business.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | V. | WARRANTY
| | -- | --------

| | The
Company generally provides a one year to three year standard warranty for its products,
depending on the type of product and the country in which the Company does business. The
Company records a provision for the estimated cost to repair or replace products under
warranty at the time of sale. Factors that affect the Companys warranty reserve
include the number of units sold, historical and anticipated rates of warranty repairs
and the cost per repair.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 2 |  | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|------ | - | ---------------------------------------

| | V. | WARRANTY
(CONT.)
| | -- | ----------------

| | The
following table provides the detail of the change in the Companys product warranty
accrual, which is a component of other accrued liabilities on the consolidated balance
sheets for the years ended December 31, 2008 and 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                     | December 31,
| | --------------------------------------------------- | ------------
|
|
|
|
| | Warranty accrual, beginning of year                 |             
| | Charged to costs and expenses relating to new sales |             
| | Costs of product warranty claims                    |             
| |                                                     |             
| | Warranty accrual, end of year                       |             
| |                                                     |             

| | At
December 31, 2008, short term and long term accrued warranty amounted to $1,566 and
$1,117, respectively. At December 31, 2007, short term and long term accrued warranty
amounted to $1,312 and $730, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | W. | COMPREHENSIVE
INCOME
| | -- | --------------------

| | The Company reports comprehensive
income in accordance with SFAS No. 130, Reporting Comprehensive Income. This
statement establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. Comprehensive income
generally represents all changes in stockholders equity during the period except
those resulting from investments by, or distributions to, stockholders. The Company
determined that items of other comprehensive income relate to unrealized gains and losses
on available-for-sale securities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | X. | TREASURY
SHARES
| | -- | ---------------

| | The Company repurchases its Ordinary
Shares from time to time on the open market and holds such shares as treasury stock. The
Company accounts for the repurchases of its Ordinary Shares in accordance with Accounting
Principles Board No. 6, Status of Accounting Research Bulletins (APB No.
6). The Company presents the cost to repurchase treasury stock as a reduction of
shareholders equity.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In February 2008, the FASB issued
FASB Staff Position (FSP) FAS No. 157-2, Effective Date of FASB
Statement No. 157 (FSP FAS 157-2), to delay the effective date of FASB
Statement 157 for one year for certain nonfinancial assets and nonfinancial liabilities,
excluding those that are recognized or disclosed in financial statements at fair value on
a recurring basis (that is, at least annually).  For purposes of applying the
FSP FAS 157-2, nonfinancial assets and nonfinancial liabilities include all assets and
liabilities other than those meeting the definition of a financial asset or a financial
liability in FASB Statement 159.   FSP FAS 157-2 defers the effective date of
Statement 157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of this FSP FAS 157-2. The Company
does not expect the adoption of FAS 157 for the certain nonfinancial assets and
nonfinancial liabilities, excluding those that are recognized or disclosed in the
financial statements at fair value on a recurring basis, to have a material impact on its
financial position, results of operations or cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 2 |  | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|------ | - | ---------------------------------------

| | Y. | IMPACT
OF RECENTLY ISSUED ACCOUTING STANDARDS (CONT.)
| | -- | -----------------------------------------------------

| | In
March 2008, the FASB issued Statement 161, Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161) an amendment to FASB No. 133.  This
statement changes the disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures about (a)
how and why and entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows.  This
Statement is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008.  Early application is encouraged.  The
Company does not expect the adoption of SFAS 161 to have a material impact on its
financial position, results of operations or cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the Financial Accounting Standards Board ratified a consensus opinion
reached by the Emerging Issues Task Force (EITF) on EITF Issue 07-1, Accounting
for Collaborative Arrangements (EITF 07-1). The guidance in EITF 07-1
defines collaborative arrangements and establishes presentation and disclosure
requirements for transactions within a collaborative arrangement (both with third parties
and between participants in the arrangement).  The consensus in EITF 07-1 is
effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2008. The consensus requires retrospective application to all
collaborative arrangements existing as of the effective date, unless retrospective
application is impracticable. The impracticability evaluation and exception should be
performed on an arrangement-by-arrangement basis.  The Company is evaluating
the impact EITF 07-1 will have on its financial statements. The Company currently does
not believe that the adoption of EITF 07-1 will have a significant effect on its
financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 amends ARB 51,
Consolidated Financial Statements, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the noncontrolling interest.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | It
also requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the noncontrolling
interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008. The adoption of SFAS 160 is not expected to have a
material effect on accounting for the Companys current subsidiaries.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 2 |  | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|------ | - | ---------------------------------------

| | Y. | IMPACT
OF RECENTLY ISSUED ACCOUTING STANDARDS (CONT.)
| | -- | -----------------------------------------------------

| | In December 2007, the FASB
issued SFAS 141(R), Business Combinations (SFAS 141(R)). This
Statement replaces SFAS No. 141, Business Combinations, and requires an
acquirer to recognize the assets acquired, the liabilities assumed, including those
arising from contractual contingencies, any contingent consideration and any
noncontrolling interest in the acquiree at the acquisition date, measured at their fair
values as of that date, with limited exceptions specified in the statement.
SFAS 141(R) also requires the acquirer in a business combination achieved in stages
(sometimes referred to as a step acquisition) to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts
of their fair values (or other amounts determined in accordance with SFAS 141(R)). In
addition, SFAS 141(R)s requirement to measure the noncontrolling interest in the
acquiree at fair value will result in recognizing the goodwill attributable to the
noncontrolling interest in addition to that attributable to the acquirer.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
141(R) applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. As such, the adoption of SFAS 141(R) is not expected to have
a material effect on accounting for the Companys current subsidiaries.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December
15, 2008. The Company does not expect the adoption of FSP 142-3 to have a material impact
on the Companys consolidated financial position, results of operations and cash
flows.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | EITF
Issue No. 08-6, Equity-Method Investment Accounting (EITF 08-6),
concludes that the cost basis of a new equity-method investment would be determined using
a cost-accumulation model, which would continue the practice of including transaction
costs in the cost of investment and would exclude the value of contingent consideration.
Equity-method investment should be subject to other-than-temporary impairment analysis.
It also requires that a gain or loss to be recognized on the portion of the investors
ownership sold. EITF 08-6 will be effective for the reporting period beginning after
December 15, 2008. The Company does not expect a material impact on its consolidated
financial statements from the adoption of EITF 08-6.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | EITF
Issue No. 08-7, Defensive Intangible Assets (EITF 08-7),
requires an acquiring entity to account defensive intangible assets as a separate unit of
accounting. Defensive intangible assets should not be included as part of the cost of the
acquirers existing intangible assets because the defensive intangible assets are
separately identifiable. Defensive intangible assets must be recognized at fair value in
accordance with SFAS 141(R) and SFAS 157. EITF 08-7 will be effective for the reporting
period beginning after December 15, 2008. The Company does not expect a material impact
on its consolidated financial statements from the adoption of EITF 08-7.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 2 |  | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|------ | - | ---------------------------------------

| | Y. | IMPACT
OF RECENTLY ISSUED ACCOUTING STANDARDS (CONT.)
| | -- | -----------------------------------------------------

| | In May 2008, the FASB issued SFAS No.
162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162
identifies the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting principles in
the United States. It is effective 60 days following the SECs approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. The
Company is currently evaluating the impact of SFAS No. 162 on its financial statements,
and the adoption of this Statement is not expected to have a material effect on the
Companys financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 29, 2008, the FASB issued FSP No.132 (R)-a, Employers Disclosures
about Pensions and Other Postretirement Benefits, to require that an employer
disclose the following information about the fair value of plan assets: 1) the level
within the fair value hierarchy in which fair value measurements of plan assets fall; 2)
information about the inputs and valuation techniques used to measure the fair value of
plan assets; and 3) a reconciliation of beginning and ending balances for fair value
measurements of plan assets using significant unobservable inputs.  The FSP
will be effective for fiscal years ending after December 15, 2009, with early application
permitted. Application of the FSP would not be required for earlier periods that are
presented for comparative purposes.  The Company is currently evaluating the
potential impact of adopting this FSP on its disclosures in the financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2008, the FASB issued FSP EITF No. 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities. Under the FSP, unvested share-based payment awards that contain rights
to receive non-forfeitable dividends (whether paid or unpaid) are participating
securities, and should be included in the two-class method of computing EPS. The FSP is
effective for fiscal years beginning after December 15, 2008, and interim periods
within those years, and is not expected to have a significant impact on the consolidated
financial statements
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 3 |  | AVAILABLE-FOR-SALE  MARKETABLE SECURITIES
|------ | - | ------------------------------------------

|                                                    | December 31, 2008
|--------------------------------------------------- | -----------------
|
|
|
|
|Equity securities                                   |                  
|                                                    |                  
|Available-for-sale - matures within one year:       |                  
|Government debentures - fixed interest rate         |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|Available-for-sale - matures after one year         |                  
|through three years:                                |                  
|                                                    |                  
|Government debentures - fixed interest rate         |                  
|Corporate debentures - fixed interest rate          |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|Available-for-sale - matures after three years      |                  
|through five years:                                 |                  
|Government debentures - fixed interest rate         |                  
|Corporate debentures - fixed interest rate          |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|Available-for-sale - matures after five years:      |                  
|Government debentures - fixed interest rate         |                  
|Corporate debentures - fixed interest rate          |                  
|Corporate debentures - floating interest rate       |                  
|Auction rate securities                             |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|Reclassification of certain securities to Long Term |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  

F - 27

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 3 |  | AVAILABLE-FOR-SALE  MARKETABLE SECURITIES (CONT.)
|------ | - | --------------------------------------------------

|                                                    | December 31, 2007
|--------------------------------------------------- | -----------------
|
|
|
|
|Equity securities                                   |                  
|                                                    |                  
|                                                    |                  
|Available-for-sale - matures within one year:       |                  
|                                                    |                  
|Government debentures - fixed interest rate         |                  
|Corporate debentures - fixed interest rate          |                  
|Auction rate securities                             |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|Available-for-sale - matures after one year         |                  
|through three years:                                |                  
|                                                    |                  
|Government debentures - fixed interest rate         |                  
|Corporate debentures - fixed interest rate          |                  
|Auction rate securities                             |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|Available-for-sale - matures after three years      |                  
|through five years:                                 |                  
|                                                    |                  
|Government debentures - fixed interest rate         |                  
|Corporate debentures - fixed interest rate          |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|Available-for-sale - matures after five years:      |                  
|                                                    |                  
|Government debentures - fixed interest rate         |                  
|Corporate debentures - fixed interest rate          |                  
|Corporate debentures - floating interest rate       |                  
|Auction rate securities                             |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|Reclassification of certain securities to Long Term |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  

The unrealized losses in the
Companys investments in all types of securities are mainly attributed to recent
market events. The contractual cash flows of these investments are either guaranteed by
the U.S. Government or an agency of the U.S. Government or were issued by highly rated
corporations and other governments. As the Company has the ability to hold these
investments until maturity, it is expected that these securities would not be settled at a
price less than the amortized cost of the Companys investments. Therefore, the
securities, except for certain ARS, were not considered to be other than temporarily
impaired at December 31, 2008.

|Note 4 |  | FAIR VALUE MEASUREMENT
|------ | - | ----------------------

In accordance with SFAS 157, the
Company measures cash equivalents, short-term deposits, marketable securities, auction
rate securities and foreign currency derivative contracts at fair value. Cash equivalents,
short-term deposits, marketable securities and severance pay fund are classified within
Level 1 or Level 2. This is because cash equivalents, short-term deposits, marketable
securities and severance pay fund are valued using quoted market prices or alternative
pricing sources and models utilizing market observable inputs. Investments in auction rate
securities are classified within Level 3 because they are valued using valuation
techniques. Some of the inputs to these models are unobservable in the market and are
significant.

F - 28

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 4 |  | FAIR VALUE MEASUREMENT (CONT.)
|------ | - | ------------------------------

Due to the current economic
environment in which there is a lack of market activity for auction rate securities, the
Company has been unable to obtain quoted prices or market prices for identical assets as
of the measurement date resulting in significant unobservable inputs used in determining
the fair value. The Company with its third party advisor estimated the fair value of these
auction rate securities using the income approach based on the following: (i) the
underlying structure and contractual provisions of each security; (ii) the present value
of future principal and interest payments discounted at rates considered to reflect
current market conditions; and (iii) consideration of the probabilities of default,
auction failure, or repurchase at par for each period. These estimated fair values could
change significantly based on future market conditions, which could result in recognizing
other-than-temporary impairment losses.

The Companys financial assets
measured at fair value on a recurring basis, excluding accrued interest components,
consisted of the following types of instruments as of December 31, 2008:

|                                                 | Level 1 | Level 2 | Level 3 | Total
|------------------------------------------------ | ------- | ------- | ------- | -----
|
|
|
|
|Corporate debentures                             |         |         | $       | -    
|Auction rate securities                          |         |         |         | -    
|U.S. government, agency and municipal debentures |         |         |         | -    
|Equity securities                                |         |         |         | 300  
|Foreign currency derivatives                     |         |         |         | -    
|                                                 |         |         |         |      
|                                                 |         |        
|Total                                            |         |         | $       | 300  
|                                                 |         |         |         |      

The following table presents the
changes in Level 3 instruments measured on a recurring basis for the year ended
December 31, 2008. The Companys Level 3 instruments consist of Auction Rate
Securities classified as available-for-sale with the unrealized losses, reported in
accumulated other comprehensive income (loss) in shareholders equity.

Fair value measurements using
significant unobservable inputs (Level 3):

|                                                                         | Auction Rate
Securities
|------------------------------------------------------------------------ | -----------------------
|
|
|
|
|Beginning balance                                                        |                        
|Transfer to Level 3                                                      |                        
|                                                                         |                        
|Unrealized losses included in earnings (other-than-temporary impairment) |                        
|Unrealized losses included in Other Comprehensive Income                 |                        
|                                                                         |                        
|Ending balance                                                           |                        
|                                                                         |                        

Consistent with the Companys
investment policy guidelines, the ARS investments held by the Company all had AAA/Aaa
credit ratings at the time of purchase. With the liquidity issues experienced in global
credit and capital markets, the ARS held by the Company at December 31, 2007 and 2008
have experienced multiple failed auctions as the amount of securities submitted for sale
has exceeded the amount of purchase orders.

The estimated market value of the
Companys ARS holdings in collateralized debt obligations and a certain ARS for the
years ended December 31, 2008 and 2007 was $2,154 and $728, which reflects impairment of
$7,329 and $5,776 respectively, to the carrying value of $8,050. Based on respectively
valuation models and an analysis of other-than-temporary cumulative impairment factors,
the Company has recorded a pre-tax impairment charge of $1,553 in 2008 and $ 5,776 in
2007, reflecting the portion of ARS holdings that the Company has concluded have
another-than-temporary decline in value.

F - 29

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

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

| |                                      | December 31,
| | ------------------------------------ | ------------
|
|
|
|
| | Government authorities               |             
| | Prepaid expenses                     |             
| | Deferred taxes                       |             
| | Amount deposited in escrow agent (*) |             
| | Other receivables                    |             
| |                                      |             
| |                                      |             
| |                                      |             
| |                                      |             

| | (*) 
See Note 1(D).
| | -------------------

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

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

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

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

| | (*) | The
structured note was 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. The structured note was fully redeemed during 2008.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 8 |  | INVESTMENTS IN AFFILIATED COMPANIES
|------ | - | -----------------------------------

| |                                                | December 31,
| | ---------------------------------------------- | ------------
|
|
|
|
| | Investment in Fluorinex Active Ltd. (1)        |             
| | Investment in Q'Ray Ltd. (2)                   |             
| | Investment in Rakuto Bio Technologies Ltd. (3) |             
| |                                                |             
| |                                                |             
| |                                                |             

| | (1) | In
April 2007, the Company entered into a share purchase agreement           (SPA)
with Fluorinex Active Ltd., an Israeli development stage           company engaged in the
development of new tooth decay and dental caries           prevention method and device.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During 2007, the Company invested
$1,022 in consideration for 38.47% of Fluorinexs Series B Preferred shares. During
2008, following Fluorinexs achievement of certain milestones, the Company invested
an additional amount of $653 in consideration of 3.85% of Fluorinexs Series B
Preferred shares. As of December 31, 2008, Fluorinex has achieved all the milestones
according to the agreement and the Company holds 42.32% of Fluorinexs Series B
Preferred shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 8 |  | INVESTMENTS IN AFFILIATED COMPANIES (CONT.)
|------ | - | -------------------------------------------

| | The investment is stated at cost,
since the investment in Series B Preferred shares is not considered by the Company to be
an investment in substance Common stock.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | In
October 2007, the Company entered into an agreement with Shaldot Metal Works
          Ltd. (Shaldot) and its subsidiary QRay Ltd. (QRay), an
          Israeli medical development stage company developing light-based products that
          impact cellular tissue (see Note 13 C). As of December 31, 2007, the total
          investment in QRay includes $1,050 paid in consideration for 9% of QRays
          Ordinary shares. The investment is stated at cost.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | In August 2007, the Company entered
into a term sheet with Rakuto Bio Technologies Ltd. (RBT), an Israeli medical
development stage company developing non-chemical solutions for skin and hair lightening.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant to the term sheet, the
Company granted RBT a convertible loan in the amount of $500. In February 2008, the
Company entered into a final share purchase (SPA) agreement with RBT whereby
the Company converted the loan and invested an additional amount of $280 in consideration
of 8.2% of RBTs Series A Preferred shares and undertook to invest an additional
amount of up to $1,720 subject to RBT meeting certain milestones and conditions detailed
in the SPA. As of December 31, 2008, investment in RBT amounted to $1,500 in consideration
for 15.9% of RBTs series A Preferred shares.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The investment is stated at cost,
since the investment in Series B Preferred shares is not considered in substance Common
stock.
| | --------------------------------------------------------------------------------------------------------------------------------

|Note 9 |  | PROPERTY AND EQUIPMENT, NET
|------ | - | ---------------------------

| |                                                             | December 31,
| | ----------------------------------------------------------- | ------------
|
|
|
|
| | Cost                                                        |             
| | Computers, software, manufacturing and laboratory equipment |             
| | Leasehold Improvements                                      |             
| | Office furniture and equipment                              |             
| |                                                             |             
| |                                                             |             
| | Total cost                                                  |             
| |                                                             |             
| | Accumulated depreciation                                    |             
| | Computers, software, manufacturing and laboratory equipment |             
| | Leasehold Improvements                                      |             
| | Office furniture and equipment                              |             
| |                                                             |             
| |                                                             |             
| | Total accumulated depreciation                              |             
| |                                                             |             
| |                                                             |             
| | Property and equipment, net                                 |             
| |                                                             |             

| | Depreciation
expenses for the years ended December 31, 2008, 2007 and 2006 were $1,545, $656, $422,
respectively.
| | -----------------------------------------------------------------------------------------------------------------

| | (*) | Including
depreciation expenses in the amount of $350 as a result of leasehold
               improvements that are not in use in Syneron Canada Corp.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 10 |  | INTANGIBLE ASSETS, NET
|------- | - | ----------------------

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
| | Original cost                  |             
| | Patent (1)                     |             
| | Distribution agreements (2)    |             
| | Brand name (3)                 |             
| | In process R&D (4)             |             
| | Developed technology (5)       |             
| |                                |             
| |                                |             
| | Total cost                     |             
| |                                |             
| |                                |             
| | Accumulated amortization (6)   |             
| | Patent                         |             
| | Distribution agreements        |             
| | Brand name                     |             
| | In process R&D                 |             
| | Developed technology           |             
| |                                |             
| | Total accumulated amortization |             
| |                                |             
| |                                |             
| | Amortized cost                 |             
| |                                |             

| | (1) | In
December 2004 and November 2006, the Company purchased two U.S. patents, in
               the total amount of $1,466 and $250, respectively. The Company estimated
the                useful life of these patents at five years each, from the purchase
date.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
               annual amortization expense relating to the patents as of December 31,
2008 is                estimated to be as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------

| |       | 
| | ----- | 
|
|
|
|
| | 2009  | 
| | 2010  | 
| | 2011  | 
| |       | 
| | Total | 
| |       | 

| | (2) | Distribution
agreements represent two distributors agreements related to                Light
Instruments. (See Note 1(C)).
| | --- | ----------------------------------------------------------------------------------------------------------------------------

| | (3) | Brand
name represents trade names and trademarks related to Light Instruments.
               (See Note 1(C)).
| | --- | --------------------------------------------------------------------------------------------------------------

| | (4) | The
Company expensed in-process research and development (IPR&D) in the
               amount of $99 upon acquisition as it represents incomplete research and
               development project that had not reached technological feasibility and had
no                alternative future use as of the date of the acquisition (See Note
1(C)).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Developed
technology represents existing and current technology (see Note 1(C)                and
1(D)).
| | --- | --------------------------------------------------------------------------------------------------------

| | (6) | Amortization
expenses amounted to $592 for the year ended December 31, 2008 (see                Note
1(C) )
| | --- | -----------------------------------------------------------------------------------------------------------

F - 32

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 10 |  | INTANGIBLE ASSETS, NET (CONT.)
|------- | - | ------------------------------

| | The
annual amortization expense relating to intangible assets existing as of December 31,
2008 is estimated to be as follows:
| | -----------------------------------------------------------------------------------------------------------------------------

| |            | 
| | ---------- | 
|
|
|
|
| | 2009       | 
| | 2010       | 
| | 2011       | 
| | 2012       | 
| | 2013       | 
| | Thereafter | 
| |            | 
| | Total      | 
| |            | 

|Note 11 |  | GOODWILL
|------- | - | --------

| | Changes
in goodwill for the years ended December 31, 2008 and 2007 is as follows:
| | ---------------------------------------------------------------------------------

| |                                                       | December 31,
| | ----------------------------------------------------- | ------------
|
|
|
|
| | Goodwill, beginning of year                           |             
| | Acquisition of minority shares in LI (see note 1(C) ) |             
| |                                                       |             
| |                                                       |             
| | Goodwill, end of year                                 |             
| |                                                       |             

|Note 12 |  | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|------- | - | -------------------------------------------

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

| | (*) | As
part of the Companys ongoing business operations, the Company incurred
          workforce rebalancing  charges for severance  and related  costs within the Company  during
               fiscal 2008. The liability incurred amounted to $1,868.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (**) | See
Note 1(D).
| | ---- | --------------

F - 33

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 13 |  | OMMITMENTS AND CONTINGENCIES
|------- | - | ----------------------------

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

| | In
June 2004, the Company has entered into an agreement effective from December 1, 2003 and
until 2021, for using know-how of a third party, in which the Company is obligated to pay
royalties, at a rate of 4.5%, on sales of certain products to its distributors and
subsidiaries.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Expenses
in respect of royalties amounted to $1,287, $1,547 and $1,311 for the years ended
December 31, 2008, 2007 and 2006, respectively, and were recorded as part of cost of
revenues.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company operates from facilities in Canada, the United States, Germany, Hong-Kong and
Israel that are leased for periods expiring in years 2009 through 2012.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company leases vehicles under standard commercial operating leases.
| | -----------------------------------------------------------------------

| | The
future minimum lease commitments of the Group under various non-cancelable operating
lease agreements in respect of premises and motor vehicles, that are in effect as of
December 31, 2008, are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ended December 31, | 
| | ----------------------- | 
|
|
|
|
| | 2009                    | 
| | 2010                    | 
| | 2011                    | 
| | 2012                    | 
| |                         | 
| |                         | 
| |                         | 

| | Rent
expenses amounted to $1,248, $889 and $546 for the years ended December 31 2008, 2007 and
2006, respectively.
| | ------------------------------------------------------------------------------------------------------------------

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

| | 1. | On July 29, 2004, Shaldot Metal Works
Ltd. (Shaldot), a privately owned Israeli company, sued the Company and Dr.
Eckhouse, claiming that the Companys products infringe Shaldots Israeli
patent. Shaldot sued the Company for monetary damages and requested an injunctive relief.
In the Companys Statement of Defense the Company filed a counter claim against
Shaldot. On October 9, 2007, without admitting any liability or infringement of the patent
in suit, the Company entered into a settlement to resolve this matter and entered into a
license agreement with Shaldot, and its subsidiary QRay Ltd., an Israeli medical
development stage company developing light based products that impact cellular tissue
(QRay), to whom the patent was assigned. Under the license agreement the
Company received a license to use and utilize the patent in suit in any of its products.
In return, the Company agreed to pay QRay a one-time license fee of $100. In addition, the
Company entered into a share purchase agreement with Shaldot and QRay whereby the Company
invested $1,050 in QRay in consideration for 9% of QRays share capital. If QRay will
meets certain milestones within three and a half years as of the closing of the
transaction, the Company is obligated to invest an additional $ 450 in QRay.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 13 |  | COMMITMENTS AND CONTINGENCIES (CONT.)
|------- | - | -------------------------------------

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

| | 2. | In
September 2005 and further dates thereafter, nine plaintiffs filed complaints
               in which the Company and its subsidiary, Syneron Inc., are named as
defendants                along with other named defendants. Eight of the plaintiffs are
African-American                women who allege they sustained burn and/or other
complications after hair                removal or skin rejuvenation treatments were
administered by one of the                Companys customers with one of its
products. In addition to traditional                product liability and negligence
theories, the complaint alleges theories of                fraud, negligent
misrepresentation, illegal sale of a dangerous prescriptive                device and
intentional race discrimination. The Company and its subsidiary have
               appeared in the court hearings. A vigorous defense to all of the
allegations is                being funded and controlled by an insurance company that
issued an insurance                policy to the Companys subsidiary and under
which the Company is also                additionally insured through a controlling
interest endorsement. The insurance                company has reserved the right to deny
coverage on some of the claims (product                liability-intentional failure to
warn, product liability-fraud, and intentional                racial discrimination)
which means there is a possibility that these claims                would not be covered
by the insurance policy. In addition, the complaint seeks                recovery for
punitive damages which the insurance company has advised the                Company that
it is not covered by the insurance policy.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company resolved the claims with all of the plaintiffs through mediation. Most of the
settlement costs were paid by the insurance company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | On
November 10, 2005, a class action was filed against one of the Companys
               subsidiaries, Syneron Inc. The plaintiff seeks injunctive relief,
statutory                damages and attorneys fees and costs as a result of the alleged
violations of                the Telephone Consumer Protection Act (TCPA).
Syneron Inc.s                insurance carrier has accepted tender of defense of
this litigation subject to a                reservation of rights. Although there appears
to be a likelihood that Syneron                Inc. will have insurance coverage for this
lawsuit and it is currently being                provided a defense through its insurance
carrier, there is the possibility that                these TCPA claims against Syneron
Inc. will not be covered by the insurance                policy. Syneron Inc. has
answered the Complaint and the parties have engaged in                discovery relating
to the appropriateness of proceeding with the action on                behalf of a class,
as well as discovery on the merits of the claim. On February                7, 2007,
Syneron Inc. filed a motion to dismiss the action and the court granted
               Syneron Inc.s motion. The plaintiff a motion for Reconsideration,
which                was denied. The plaintiff filed a notice of appeal, however, due to
the pending                appeals in two similar cases, the parties agreed that the
appeal shall be                withdrawn from active consideration without prejudice and
will leave to be                reactivated pending the resolution of the two cases
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | On
August 1, 2007, a plaintiff filed a complaint against Syneron Medical Ltd.,
          Syneron Inc., and Syneron Inc.s employee. Plaintiff claims she has been
          permanently scarred and developed abnormal pigmentation/depigmentation as a
          result of second degree burns she sustained as a result of Syneron Inc.s
          employees demonstration of a Polaris system on her leg. Syneron
          Inc.s insurance carrier has accepted defense of this litigation. The case
          was resolved
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 13 |  | COMMITMENTS AND CONTINGENCIES (CONT.)
|------- | - | -------------------------------------

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

| | 5. | On
December 31, 2007, a plaintiff filed a complaint against Syneron Medical           Ltd.,
Syneron Inc. and Syneron Inc.s employee. Plaintiff alleges that           Syneron
represented that dentists who purchased Synerons products did not           need to
have a medical doctor or other medically trained personnel operate the           device
and that it could be legally operated by an esthetician. Plaintiff           alleges that
he purchased the equipment in reliance upon these representations.           Plaintiff
further alleges that based on Synerons misrepresentation, he set           up a
dental spa operation and has suffered economic damage as a consequence of           not
being able to operate the dental spa in the manner represented by Syneron.
          Synerons insurance carrier is not expected to cover this complaint.
          Syneron intends to vigorously defend its position in this case.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | On
or around May 1, 2007, a complaint was filed against one of the           Companys
subsidiaries, Syneron Inc. by a plaintiff. Plaintiff alleges that           during a hair
removal treatment her hair was set on fire as a result of which           she suffered
various injuries. Plaintiff alleges that Syneron is the company           responsible for
the sale of the System. Syneron intends to vigorously defend its           position in
this case.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | The
Company has accrued an amount which it deems sufficient to cover probable
          losses from these claims. 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 - 36

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|                                                          
|----------------------------------------------------------
|Notes to the Consolidated Financial Statements            
|                                                          
|U.S. dollars in thousands, except share and per share data

|Note 14 |  | SHAREHOLDERS EQUITY
|------- | - | --------------------

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

| | 1. | Ordinary
shares confer upon their holders voting rights, the right to receive
               dividends and the right to share in equity upon liquidation of the
Company.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | During
2006, 1,001,543 stock options and RSU were exercised into Ordinary                shares,
in consideration of $332.
| | -- | --------------------------------------------------------------------------------------------------------------------------

| | 3. | During
2007, 310,881 stock options and RSU were exercised into Ordinary shares,
               in consideration of $3,470.
| | -- | --------------------------------------------------------------------------------------------------------------------------

| | 4. | During
2008, 220,465 stock option and RSU were exercised into Ordinary shares,                in
consideration of $4.
| | -- | ---------------------------------------------------------------------------------------------------------------------

| | 5. | In November, 2007, the Company
announced that its board of directors authorized additional repurchases of up to $50,000
of its Ordinary shares. The repurchase program has no time limit and maybe suspended from
time to time or discontinued. Under the above program, the Company repurchased during 2007
and 2008, 466,000 and 122,700 shares, respectively. The average purchase price per share
was $15.50. Such purchases of Ordinary shares are accounted for as treasury stock and
result in a reduction of shareholders equity.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | Certain
of the Companys officers, directors and major shareholders that                hold
Ordinary shares have the right to require the Company, on not more than one
               occasion, to file a registration statement on the appropriate form under
the                Securities Act in order to register the resale of their Ordinary
shares.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | During
2004 and following Israeli regulation, the Company paid stamp duty and
               recorded it as part of the initial public offering issuance expenses.
During                2008, following a Supreme Court verdict, it was determined by the
Court that                such stamp duty should be paid by domestic companies which are
traded in a                foreign stock exchange and thus each entity may appeal to the
tax authorities                for reimbursement. The Company with its legal counsel
approached the tax                authorities and received during November, 2008 the
amounts originally paid.                During 2008, the Company recorded an amount of
$588 in additional paid in                capital as a result of reimbursement of stamp
duty in Israel.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8. | On November 11, 2008, the
Companys board of directors adopted a shareholder rights plan. The shareholder
rights plan is designed to protect against any potential future use of coercive or abusive
takeover techniques designed to gain control of the Company and its capital without full
and fair value being paid to all of the Companys shareholders. The shareholder
rights plan was adopted following evaluation and consultation with outside advisors in
consideration of the Companys current low valuation and strong cash position.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|                                                          
|----------------------------------------------------------
|Notes to the Consolidated Financial Statements            
|                                                          
|U.S. dollars in thousands, except share and per share data

|Note 14 |  | SHAREHOLDERS EQUITY (CONT.)
|------- | - | ----------------------------

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

| | 8. | (cont.)
| | -- | -------

| | In connection with the adoption of
the shareholder rights plan, the Companys board of directors declared a dividend of
one right for each Ordinary share of the Company held by shareholders of record as of the
close of business on November 9, 2008. Initially, these rights will not be exercisable and
will trade with the Ordinary shares of the Company. Under the plan, these rights will
generally be exercisable only if a person or group acquires beneficial ownership of 15
percent or more of the Companys Ordinary shares or commences a tender or exchange
offer for 15 percent or more of the Companys Ordinary shares, except if such person
or group has become an Acquiring Person pursuant to an offer approved by the
majority of the board of directors. If a person or group acquires beneficial ownership of
15 percent or more of the Companys Ordinary shares (except if such person or group
has become an Acquiring Person pursuant to an offer approved by the majority
of the board of directors), each right will generally entitle the holder, other than the
acquiring person or group, to acquire, for the exercise price of $0.01 per share (subject
to adjustment as provided in the plan), two (2) Ordinary shares of the Company. In
addition, if, after a person acquires such ownership, the Company engages in a merger in
which it is not the survivor or its Ordinary shares are changed or exchanged, or sells or
transfers more than 50 percent of its assets or earning power, each right will generally
entitle the holder, other than the acquiring person or group, to acquire, for the exercise
price of $0.01 per share (subject to adjustment as provided in the plan), two (2) times
the shares of the acquiring company to which each of the shareholders of the Company is
entitled to for each Ordinary share.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Companys board of directors
may redeem the rights at a price of $0.0001 per right at any time up to ten days after a
person or group acquires beneficial ownership of 15 percent or more of the Companys
Ordinary shares. The rights plan will continue in effect until November 9, 2009, unless
earlier redeemed or amended by the Companys board of directors.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shareholders
are not required to take any actions to receive the rights distribution. Until the rights
become exercisable, outstanding share certificates will represent both Ordinary shares of
the Company and the rights.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | As
of December 31, 2008, there were 1,833,269 options available for future grant.
| | ---------------------------------------------------------------------------------

F - 38

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|                                                          
|----------------------------------------------------------
|Notes to the Consolidated Financial Statements            
|                                                          
|U.S. dollars in thousands, except share and per share data

|Note 14 |  | SHAREHOLDERS EQUITY (CONT.)
|------- | - | ----------------------------

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

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

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

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

| | The
intrinsic value of options and RSU exercised by employees during the years ended on
December 31, 2008, 2007 and 2006 was $3,320, $4,308 and $26,164, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As of December 31, 2008,
2007 and 2006, the total unrecognized estimated compensation costs related to non-vested
stock options and RSUs granted prior to that date were $6,787 and $ 11,790 and
$16,069, respectively which are expected to be recognized over a weighted average
period of 1.49, 1.31 and 1.45 years, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 39

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|                                                          
|----------------------------------------------------------
|Notes to the Consolidated Financial Statements            
|                                                          
|U.S. dollars in thousands, except share and per share data

|Note 14 |  | SHAREHOLDERS EQUITY (CONT.)
|------- | - | ----------------------------

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

| | The
information regarding the options and RSUs outstanding as of December 31, 2008, is as
follows:
| | --------------------------------------------------------------------------------------------------

|        | Outstanding | Weighted
average
remaining
contractual
life
(years) | Aggregate
intrinsic
value (*) | Weighted
average
exercise
price | Exercisable | Weighted
average
remaining
contractual
life
(years) | Aggregate
intrinsic
value (*) | Weighted
average
exercise
price
|------- | ----------- | --------------------------------------------------- | ----------------------------- | ------------------------------- | ----------- | --------------------------------------------------- | ----------------------------- | -------------------------------
|
|
|
|
|RSU     |             |                                                     |                               | 110,310                         |             |                                                     | 5.68                          |                                
|Options |             |                                                     |                               | 3,843,001                       |             |                                                     | 5.96                          |                                
|        |             |                                                     |                               |                                 |             |                                                     |                               |                                
|        |             |                                                     |                               | 3,953,311                       |             |                                                     | 5.95                          |                                
|        |             |                                                     |                               |                                 |             |                                                     |                               |                                

|        |  | Vested or
expected to
vest | Weighted
average
remaining
contractual
life
(years) | Aggregate
intrinsic
value (*) | Weighted
average
exercise
price
|------- |  | -------------------------- | --------------------------------------------------- | ----------------------------- | -------------------------------
|
|
|
|
|RSU     |  |                            |                                                     | 94,715                        |                                
|Options |  |                            |                                                     | 1,825,367                     |                                
|        |  |                            |                                                     |                               |                                
|        |  |                            |                                                     | 1,920,082                     |                                
|        |  |                            |                                                     |                               |                                

| | (*) | Calculation
of aggregate intrinsic value is based on the share price of the                Companys
Common stock as of December 31, 2008 ($ 8.34 per share).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
information regarding the options and RSUs outstanding as of December 31, 2007, is
as follows:
| | ---------------------------------------------------------------------------------------------------

|        | Outstanding | Weighted
average
remaining
contractual
life
(years) | Aggregate
intrinsic
value (*) | Weighted
average
exercise
price | Exercisable | Weighted
average
remaining
contractual
life
(years) | Aggregate
intrinsic
value (*) | Weighted
average
exercise
price
|------- | ----------- | --------------------------------------------------- | ----------------------------- | ------------------------------- | ----------- | --------------------------------------------------- | ----------------------------- | -------------------------------
|
|
|
|
|RSU     |             |                                                     |                               | 271,301                         |             |                                                     | 6.22                          |                                
|Options |             |                                                     |                               | 1,276,380                       |             |                                                     | 4.99                          |                                
|        |             |                                                     |                               |                                 |             |                                                     |                               |                                
|        |             |                                                    
|        |             |                                                     |                               | 1,547,681                       |             |                                                     | 5.20                          |                                
|        |             |                                                     |                               |                                 |             |                                                     |                               |                                

|        | Vested or
expected to
vest | Weighted
average
remaining
contractual
life
(years) | Aggregate
intrinsic
value (*) | Weighted
average
exercise
price
|------- | -------------------------- | --------------------------------------------------- | ----------------------------- | -------------------------------
|
|
|
|
|RSU     |                            |                                                     |                               | 221,202                        
|Options |                            |                                                     |                               | 1,218,883                      
|        |                            |                                                     |                               |                                
|        |                            |                                                    
|        |                            |                                                     |                               | 1,440,085                      
|        |                            |                                                     |                               |                                

| | (*) | Calculation
of aggregate intrinsic value is based on the share price of the
                    Companys Common stock as of December 31, 2007 ($ 13.31 per
share).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|                                                          
|----------------------------------------------------------
|Notes to the Consolidated Financial Statements            
|                                                          
|U.S. dollars in thousands, except share and per share data

|Note 14 |  | SHAREHOLDERS EQUITY (CONT.)
|------- | - | ----------------------------

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

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

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

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

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

| | The
following table summarizes information relating to RSUs granted to employee, as well as
changes to such awards during 2008 and 2007:
| | ----------------------------------------------------------------------------------------------------------------------------------------

| |                                          | Year Ended December 31, 2008
| | ---------------------------------------- | ----------------------------
|
|
|
|
| | Outstanding at the beginning of the year |                             
| |                                          |                             
| | Granted                                  |                             
| | Exercised                                |                             
| | Forfeited                                |                             
| |                                          |                             
| |                                          |                             
| | Outstanding as of  December 31, 2008     |                             
| |                                          |                             

| |                                          | Year Ended December 31, 2007
| | ---------------------------------------- | ----------------------------
|
|
|
|
| | Outstanding at the beginning of the year |                             
| |                                          |                             
| | Granted                                  |                             
| | Exercised                                |                             
| | Forfeited                                |                             
| |                                          |                             
| |                                          |                             
| | Outstanding as of  December 31, 2007     |                             
| |                                          |                             

F - 41

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|                                                          
|----------------------------------------------------------
|Notes to the Consolidated Financial Statements            
|                                                          
|U.S. dollars in thousands, except share and per share data

|Note 14 |  | SHAREHOLDERS EQUITY (CONT.)
|------- | - | ----------------------------

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

| | The
Companys outstanding RSUs to consultants as of December 31, 2008 and 2007 are
as follows:
| | -----------------------------------------------------------------------------------------------

| | 1. | As
of December 31, 2008:
| | -- | ------------------------

| |     | Issuance date | RSUs | Exercise
Price per
Share | RSUs
Exercisable | Exercisable Through
| | --- | ------------- | ----- | ------------------------ | ----------------- | -------------------
|
|
|
|
| | RSU |               |       | May 8, 2006              |                   |                    
| | RSU |               |       | November 2, 2006         |                   |                    
| |     |               |       |                          |                   |                    
| |     |               |      
| |     |               |       |                          |                   |                    
| |     |               |       |                          |                   |                    

| | 2. | As
of December 31, 2007:
| | -- | ------------------------

| |     | Issuance date | RSUs | Exercise
Price per
Share | RSUs
Exercisable | Exercisable Through
| | --- | ------------- | ----- | ------------------------ | ----------------- | -------------------
|
|
|
|
| | RSU |               |       | May 8, 2006              |                   |                    
| | RSU |               |       | November 2, 2006         |                   |                    
| |     |               |       |                          |                   |                    
| |     |               |      
| |     |               |       |                          |                   |                    
| |     |               |       |                          |                   |                    

| | A
summary of the status of the Companys nonvested RSU granted to employees as of
December 31, 2008 and 2007, and changes during the years ended December 31,
2008 and 2007, is presented below:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Nonvested shares                | Shares | Weighted average
grant date fair value
| | ------------------------------- | ------ | --------------------------------------
|
|
|
|
| | Non-vested at January 1, 2008   |        |                                       
| |                                 |        |                                       
| | Granted                         |        |                                       
| | Vested                          |        |                                       
| | Forfeited                       |        |                                       
| |                                 |        |                                       
| |                                 |        |                                       
| | Non-vested at December 31, 2008 |        |                                       
| |                                 |        |                                       

| | Nonvested shares                | Shares | Weighted average
grant date fair value
| | ------------------------------- | ------ | --------------------------------------
|
|
|
|
| | Non-vested at January 1, 2007   |        |                                       
| |                                 |        |                                       
| | Granted                         |        |                                       
| | Vested                          |        |                                       
| | Forfeited                       |        |                                       
| |                                 |        |                                       
| |                                 |        |                                       
| | Non-vested at December 31, 2007 |        |                                       
| |                                 |        |                                       

F - 42

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|                                                          
|----------------------------------------------------------
|Notes to the Consolidated Financial Statements            
|                                                          
|U.S. dollars in thousands, except share and per share data

|Note 14 |  | SHAREHOLDERS EQUITY (CONT.)
|------- | - | ----------------------------

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

| | The
weighted average fair values of options granted (including those granted to non-employees
but excluding RSUs) during the years ended December 31, 2008, 2007 and 2006 were:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
weighted-average estimated fair value of employee stock options granted during the 12
months ended December 31, 2008, 2007 and 2006 was calculated using the binomial model
with the following weighted-average assumptions (annualized percentages):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                | Year ended December 31,
| | ------------------------------ | -----------------------
|
|
|
|
| | Volatility                     | 56%                    
| | Risk-free interest rate        | 3.06%                  
| | Dividend yield                 | 0%                     
| | Post-vest cancellation rate *) | 5%                     
| | Suboptimal exercise factor **) | 2                      
| | Expected life years            | 4.45                   

| | *) | The
post-vest cancellation rate was calculated on a monthly basis and is           presented
here on an annual basis.
| | -- | ---------------------------------------------------------------------------------------------------------------------

| | **) | The
ratio of the stock price to strike price at the time of exercise of the           option.
| | --- | ---------------------------------------------------------------------------------------------

| | The
Company used volatility data of comparable companies with similar characteristics
to the Company, i.e. profitability, for calculating volatility in accordance with SFAS
123(R). The computation of historical volatility was derived from the comparable companies historical
volatility for similar contractual terms. As a result of the above-mentioned
calculations, the weighted-average volatility used for the 12 months ended December 31,
2008 and 2007 was 56% and 65%, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
risk-free interest rate assumption is based on observed interest rates appropriate for
the term of the Companys employee stock options. Weighted average interest rate
used for the 12 months ended December 31, 2008 and 2007 was 3.06% and 4.8% respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is required to assume a dividend yield as an input in the binomial model. The
dividend yield assumption is based on the Companys historical and expectation of
future dividend payouts and may be subject to substantial change in the future. The
dividend yield used for the twelve months ended December 31, 2008 and 2007 was 0%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 43

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

|                                                          
|----------------------------------------------------------
|Notes to the Consolidated Financial Statements            
|                                                          
|U.S. dollars in thousands, except share and per share data

|Note 14 |  | SHAREHOLDERS EQUITY (CONT.)
|------- | - | ----------------------------

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

| | The
expected life of employee stock options represents the weighted-average period the stock
options are expected to remain outstanding and is a derived output of the binomial model.
The expected life of employee stock options is impacted by all of the underlying
assumptions used in the Companys model. The binomial model assumes that employees exercise
behavior is a function of the options remaining contractual life and the extent to
which the option is in-the-money (i.e., the average stock price during the period is
above the strike price of the stock option). The binomial model estimates the probability
of exercise as a function of these two variables based on the history of exercises and
factors in also the post vesting termination rate of employees, as termination triggers
the truncation of employee awards shortly thereafter. The expected life derived from the
binomial model was a weighted average of 4.45 and 3.04 years for options granted during
the 12 months ended December 31, 2008 and 2007, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
equity-based compensation expense recognized in the consolidated statement of income is
based on awards ultimately expected to vest, it should be reduced for estimated
forfeitures. Statement 123(R) requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pre-vesting
forfeitures were estimated in 2008 and 2007 to be approximately 13.63% for options and
21.15% for RSU, for the full term of the award on a weighted average basis, based on
historical experience.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys aggregate compensation cost for the years ended December 31, 2008, 2007
and 2006 totaled $7,592, $ 7,809 and $8,256, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total equity-based compensation expense related to all of the Companys equity-based
awards, recognized for years ended December 31, 2008, 2007 and 2006, was comprised as
follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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 - 44

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 15 |  | INCOME TAXES
|------- | - | ------------

| | A. | Effective
January 1 2007, the Company adopted FIN 48. FIN 48 prescribes a           recognition
threshold and measurement attribute for the financial statements           recognition
and measurement of a tax position taken or expected to be taken in           tax return.
The implementation of FIN 48 did not have a significant impact on           the Companys
financial position or results of operations.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company           recognizes interest and penalties related to income taxes in tax
expenses line           in its consolidated statements. The Company has approximately
$331 accrued for           the payments of interest and penalties as of December 31,
2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
reconciliation of the beginning and ending balances of the total amounts of gross tax
liabilities is as follows:
| | ------------------------------------------------------------------------------------------------------------------

| |                                                     | 
| | --------------------------------------------------- | 
|
|
|
|
| | Gross tax liabilities at January 1, 2008 (*)        | 
| | Decreases in tax positions for prior years          | 
| | Increases in tax positions for current year         | 
| | Decreases in tax position resulting from settlement | 
| |                                                     | 
| | Gross tax liabilities at December 31, 2008          | 
| |                                                     | 

| | (*) | All
of Companys gross tax liabilities as of January 1, 2007 were already
          accrued under prior GAAP before the adoption of FIN 48.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company operates in multiple jurisdictions throughout the world, and its tax returns are
periodically audited or subject to review by both domestic and foreign authorities. As a
result of ongoing examinations, tax proceedings in certain countries, additions to
unrecognized tax benefits for positions taken and interest and penalties, if any, arising
in 2008, it is not possible to estimate the potential net increase or decrease to the
Companys unrecognized tax benefits during the next twelve months. The following
describes the open tax years, by major tax jurisdiction, as of December 31, 2008:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |               |               
| | ------------- | --------------
|
|
|
|
| | Israel        | 2006 - present
| | United States | 2002 - present
| | Germany       | 2001 - present
| | Canada        | 2004 - present

| | B. | ISRAELI
TAXATION
| | -- | ----------------

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

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

| | 2. | Measurement
of taxable income:
| | -- | ------------------------------

| | On
February 26, 2008, the Israeli Parliament (the Knesset) enacted the Income Tax Law
(Inflationary Adjustments) (Amendment No. 20) (Restriction of Effective Period), 2008,
which the Company refers to as the Inflationary Adjustments Amendment. In accordance with
the Inflationary Adjustments Amendment, the effective period of the Inflationary
Adjustments Law will cease at the end of the 2007 tax year and as of the 2008 tax year
the provisions of the law shall no longer apply, other than the transitional provisions
intended at preventing distortions in the tax calculations. In accordance with the
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 45

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 15 |  | INCOME TAXES (CONT.)
|------- | - | --------------------

| | B. | ISRAELI
TAXATION (CONT.)
| | -- | ------------------------

| | 2. | Measurement
of taxable income (cont.):
| | -- | --------------------------------------

| | Inflationary
Adjustments Amendment, commencing the 2008 tax year, income for tax purposes will no
longer be adjusted to a real (net of inflation) measurement basis. Furthermore, the
depreciation of inflation immune assets and carried forward tax losses will no longer be
linked to the Israeli Consumer Price Index.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with 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
an Industry (Taxes), 1969, and as such, the Company is entitled to certain tax benefits,
mainly amortization of costs relating to know-how and patents over eight years,
accelerated depreciation and the right to deduct public issuance expenses for tax
purposes.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Tax
Benefits Under the Law for the Encouragement of Capital Investments, 1959
(the Law):
| | -- | ------------------------------------------------------------------------------------------

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

| | On
April 1, 2005, an amendment to the Investment Law came into effect (the Amendment)
and has significantly changed the provisions of the Investment Law. The Amendment limits
the scope of enterprises which may be approved by the Investment Center by setting
criteria for the approval of a facility as a Beneficiating Enterprise, such as provisions
generally requiring that at least 25% of the Beneficiating Enterprises income will
be derived from export. Additionally, the Amendment enacted major changes in the manner
in which tax benefits are awarded under the Investment Law so that companies no longer
require Investment Center approval in order to qualify for tax benefits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 46

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 15 |  | INCOME TAXES (CONT.)
|------- | - | --------------------

| | B. | ISRAELI
TAXATION (CONT.)
| | -- | ------------------------

| | 4. | Tax
Benefits Under the Law for the Encouragement of Capital Investments, 1959 (the
Law) (cont.):
| | -- | --------------------------------------------------------------------------------------------------

| | The
Company has been granted the status of Approved Enterprises, under the Law,
for an investments program for the period ending in 2004, and the status of Beneficiating
Enterprise according to the Amendment to the Law, for investments in 2005 through
2007 (Programs).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Out
of the Companys retained earnings as of December 31, 2008 approximately $144
million are tax-exempt earnings attributable to its Approved Enterprise programs and $61
million are tax-exempt earnings attributable to its Beneficiating Enterprise program. The
tax-exempt income attributable to the Approved and Beneficiating Enterprise cannot be
distributed to shareholders without subjecting the Company to taxes. If dividends are
distributed out of tax-exempt profits, the Company will then become liable for tax at the
rate applicable to its profits from the approved enterprise in the year in which the
income was earned, as if it was not under the Alternative benefits program(tax
at the rate of 10%-25%). According to the Amendment, tax-exempt income generated under
the Beneficiating Enterprise status will be taxed upon dividend distribution or complete
liquidation, whereas tax exempt income generated under the Approved Enterprise status
will be taxed only upon dividend distribution (and not upon complete liquidation, where
the tax liability will be incurred by the shareholders). As of December 31, 2008, if the
income attributed to the Approved Enterprise were distributed as dividend, the Company
would incur a tax liability of approximately up to $ 22 million (depending on the
tax rate as described above). If income attributed to the Beneficiating Enterprise were
distributed as dividend, including upon liquidation, the Company would incur a tax
liability in the amount of approximately up to $ 9 million (depending on the tax
rate as described above).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

F - 47

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 15 |  | INCOME TAXES (CONT.)
|------- | - | --------------------

| | B. | ISRAELI
TAXATION (CONT.)
| | -- | ------------------------

| | 4. | Tax
Benefits Under the Law for the Encouragement of Capital Investments, 1959 (the
Law) (cont.):
| | -- | --------------------------------------------------------------------------------------------------

| | Should Syneron Medical Ltd. fail to
meet such requirements in the future, income attributable to its programs could be subject
to the statutory Israeli corporate tax rate and the Company could be required to refund a
portion of the tax benefits already received, with respect to such program. The
Companys management believes that the Company is meeting the aforementioned
conditions.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income from sources other than the
Approved Enterprise is subject to tax at regular Israeli corporate tax rate of
27%.
| | ------------------------------------------------------------------------------------------------------------------------

| | C. | NON-ISRAELI
SUBSIDIARIES
| | -- | ------------------------

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

| | D. | 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,
| | ------------------------------------------------------ | ------------
|
|
|
|
| | Net operating loss carryforward of subsidiaries        |             
| | SFAS 123R- compensation costs                          |             
| | Deferred tax asset from unrealized losses on           |             
| | available-for-sale marketable securities               |             
| | Impairment of available-for-sale marketable securities |             
| | Company's capital losses carryforward (*)              |             
| | Temporary differences                                  |             
| |                                                        |             
| |                                                        |             
| | Total deferred tax asset before valuation allowance    |             
| | Valuation allowance                                    |             
| |                                                        |             
| |                                                        |             
| | Total deferred tax asset                               |             
| |                                                        |             
| | Deferred tax liability from the acquisition of a       |             
| | subsidiary (see also Note 1D)                          |             
| |                                                        |             
| | Total deferred tax liability                           |             
| |                                                        |             
| |                                                        |             
| | Net deferred tax asset                                 |             
| |                                                        |             

| | (*) | the
Company has a capital loss carryforward resulting from the difference           between
the reporting currency and the tax basis of the investments in           Marketable
securities.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 48

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 15 |  | INCOME TAXES (CONT.)
|------- | - | --------------------

| | D. | DEFERRED
INCOME TAXES (CONT.)
| | -- | -----------------------------

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

| | The
Israeli subsidiaries have available carryfoward tax loss of $3,950 to offset against
future tax profits for an indefinite period.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys subsidiary in the United States has estimated total available carryforward
tax losses of $33,604 to offset against future tax profits for periods of 15-20 years
expiring between 2017-2022.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
assessing the realization of deferred tax assets, management considers whether it is more
likely than not that all or some portion 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 and capital losses are utilized. Based on
consideration of these factors, the Company has established a valuation allowance of
$31,186 and $26,550 at December 31, 2008 and 2007, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | F. | TAXES
ON INCOME
| | -- | ---------------

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

F - 49

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 15 |  | INCOME TAXES (CONT.)
|------- | - | --------------------

| | F. | TAXES
ON INCOME (CONT.)
| | -- | -----------------------

| |                   | Year Ended December 31,
| | ----------------- | -----------------------
|
|
|
|
| | Current taxes (*) |                        
| | Deferred taxes    |                        
| |                   |                        
| |                   |                        
| |                   |                        
| |                   |                        

| | (*) | Includes
the effect of a final tax assessment with the Israeli tax authorities           for the
years 2003-2005 in the amount of ($2,003).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------

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

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

F - 50

---

---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 16 |  | FINANCIAL INCOME, NET
|------- | - | ---------------------

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

|Note 17 |  | MAJOR GEOGRAPHIC INFORMATION
|------- | - | ----------------------------

| | The
Company applies Statement of Financial Accounting Standards 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 and long-lived assets as of December 31, 2008, 2007 and
2006 and for the years then ended:
| | --------------------------------------------------------------------------------------------------------------------------------

|              | 2008 | 2007 | 2006
|------------- | ---- | ---- | ----
|
|
|
|
|North America |      |      | $   
|Europe        |      |      |     
|Asia Pacific  |      |      |     
|Israel        |      |      |     
|Others        |      |      |     
|              |      |      |     
|              |      |     
|              |      |      | $   
|              |      |      |     

F - 51

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---

|SYNERON
MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------

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

|Note 18 |  | EARNINGS PER SHARE
|------- | - | ------------------

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

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

| | Anti-dilutive
securities
| | ------------------------

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

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

|Note 19 |  | SUBSEQUENT EVENTS
|------- | - | -----------------

| | A. | On
March 10, 2009, the Companys subsidiary in the U.S., Syneron Inc., was
          served with a complaint (the complaint) from Palomar Medical
          Technologies, Inc. (Palomar). The complaint alleges infringement of
          certain US patents in connection with hair removal products sold in the United
          States. These patents are currently being reexamined by the U.S. Patent and
          Trademark Office based on different prior art. Syneron Inc.s response to
          the complaint is due till May 10, 2009. The Company intends to defend itself
          vigorously against Palomars complaint.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | On
or before March 27, 2009, we expect to receive $3,975 as consideration for           the
resolution of a dispute.
| | -- | --------------------------------------------------------------------------------------------------------------------

F - 52

---

---

SIGNATURES

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

Dated: March 24, 2009

| |  | Syneron Medical Ltd.By: /s/ Louis Scafuri
Louis ScafuriChief Executive Officer
| |  | --------------------------------------------------------------------------------------------

67

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---