|As filed with the Securities and Exchange Commission on June 28, 2006
|---------------------------------------------------------------------
|                                                                     

# SECURITIES 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, 2005

# OR

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

# For the transition
period from ____________ to

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

# Commission file
number: 1-14398

# SHAMIR OPTICAL
INDUSTRY LTD(Exact name of
registrant as specified in its charter)

|                             |                               
|---------------------------- | ------------------------------
|
|
|
|
|N/A                          | Israel                        
|(Translation of registrant's | (Jurisdiction of incorporation
|name into English)           | or organization)              

KIBBUTZ SHAMIR
UPPER GALILEE
12135 ISRAEL
(Address of principal executive offices)

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

|                                       |                                           
|-------------------------------------- | ------------------------------------------
|
|
|
|
|Title of each class:                   | Name of each exchange on which registered:
|Common Shares, par value NIS 0.01 each | NASDAQ National Market                    

# Securities registered or
to be registered pursuant to Section 12(g) of the Act: None

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

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

Ordinary
Shares, 0.01 NIS par value each, referred to in this document as 16,256,514 Common Shares

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

Yes oNo x

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

Yes oNo x

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

Yes xNo o

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

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

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

Item 17 o Item 18 x

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

Yes oNo x



---

---



# TABLE OF CONTENTS

|                                    |           |                                                                              |   
|----------------------------------- | --------- | ---------------------------------------------------------------------------- | --
|
|
|
|
|CERTAIN DEFINED TERMS               | iii      
|                                   
|FORWARD-LOOKING STATEMENTS          | iii      
|                                   
|ENFORCEABILITY OF CIVIL LIABILITIES | iv       
|                                   
|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                                                   | 13
|                                    | ITEM 4E.  | UNRESOLVED STAFF COMMENTS                                                    | 28
|                                    | ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 28
|                                    | ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 39
|                                    | ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 46
|                                    | ITEM 8.   | FINANCIAL INFORMATION                                                        | 52
|                                    | ITEM 9.   | THE LISTING                                                                  | 53
|                                    | ITEM 10.  | ADDITIONAL INFORMATION                                                       | 54
|                                    | ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 63
|                                    | ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 64
|                                   
|PART II                             |           | 65                                                                          
|                                    | ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 65
|                                    | ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 65
|                                    | ITEM 15.  | CONTROLS AND PROCEDURES                                                      | 66
|                                    | ITEM 16.  | [RESERVED]                                                                   | 66
|                                    | ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 66
|                                    | ITEM 16B. | CODE OF ETHICS                                                               | 66
|                                    | ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 67
|                                    | ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 67
|                                    | ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 67
|                                   
|PART III                            |           | 68                                                                          
|                                    | ITEM 17.  | FINANCIAL STATEMENTS                                                         | 68
|                                    | ITEM 18.  | FINANCIAL STATMENTS                                                          | 68
|                                    | ITEM 19.  | EXHIBITS                                                                     | 68

ii

---

---





# CERTAIN DEFINED TERMS

In
this annual report, unless otherwise provided, references to Shamir,
we, us and our refer to Shamir Optical Industry Ltd
(or its predecessor or successor entities) and its subsidiaries, and references to our
company refer to Shamir Optical Industry Ltd (or its predecessor or successor entities)
without its consolidated subsidiaries. The terms euro, EUR or
 refer to the common currency of twelve member states of the European
Union, NIS refers to New Israeli shekel, and dollar,
USD or $ refers to U.S. dollars.

We
own rights directly or through our subsidiary Shamir Insight Inc., in the following
trademarks in various jurisdictions world-wide: Shamir, Shamir logo, Shamir
Genesis, Genesis, Shamir Piccolo, Piccolo, Shamir Office,
Shamir Creation, Shamir Autograph, Autograph, Shamir Attitude,
Attitude, Prescriptor and Eye Point Technology Freeform, Freeform
Lenses, Freeform Technology, Freeform Software Protocol Panorama,
Eye Point, Direct Lens Technology, Autograph Golf, Autograph
Short, Autograph Everyday, Piccolo Wrap, The Progressive Lens
Experts, Titan Hardcoat, Deskvision, Individual Eyes, Recreating
Perfect Vision, Multispace, Nano, Piccolo Nano, Autograph
Nano, Studio Our main trademarks are registered or are in the process of being
registered in the United States, the European Union, Canada and additional countries. All
other trademarks or brand names referred to in this annual report are the property of
their respective owners.

# FORWARD-LOOKING
STATEMENTS

This
annual report includes forward-looking statements. Forward-looking statements may be, but
are not necessarily, identified by words like believe, anticipate,
intend, target, estimate, plan,
assume, may, will, should,
could and similar expressions. Forward-looking statements also include
statements containing a projection of revenues, earnings or losses, capital expenditures,
dividends, capital structure or other financial terms.

The
forward-looking statements in this annual report are based upon our managements
beliefs, assumptions and expectations of our future operations and economic performance,
taking into account currently available information. These statements are not statements
of historical fact. Forward-looking statements involve risks and uncertainties, some of
which are not currently known to us, that may cause our actual results, performance or
financial condition to be materially different from the expectations of future results,
performance of financial condition we express or imply in any forward-looking statements.
Some of the important factors that could cause our actual results, performance or
financial condition to differ materially from expectations are:

| | the
effects of competition in our industry, and changes in our relationships with optical
laboratories,      distributors, research and development partners and other third
parties;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
effects of the international expansion of our operations and our ability to manage our
growth,      including our ability to manage potential future acquisitions;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | our
ability to timely develop and market new or enhanced products and the effects of
developments in      alternative technologies and treatments in our industry;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | our
ability to protect our proprietary technology and intellectual property rights;
|- | -----------------------------------------------------------------------------------

| | our
ability to capitalize on our research and development capabilities;
|- | -----------------------------------------------------------------------

| | our
ability to retain or recruit key personnel;
|- | -----------------------------------------------

| | our
relationship with Kibbutz Shamir;
|- | -------------------------------------

| | the
effects of exchange rate fluctuations;
|- | ------------------------------------------

| | the
political, military and economic conditions in Israel;
|- | ----------------------------------------------------------

| | our
success at managing the risks of the foregoing; and
|- | -------------------------------------------------------

| | the
other factors referenced in this annual report, including, without limitation, in the
sections entitled      "Item 3.  Key Information - Risk Factors," "Item 5.  Operating and
Financial Review and Prospect" and "Item 4. Information on the Company.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
undertake no obligation to update forward-looking statements or risk factors in this
annual report to reflect new information, future events or otherwise, except as may be
required under applicable securities laws and regulations.

iii

---

---



# ENFORCEABILITY OF
CIVIL LIABILITIES

We
are a corporation organized under the laws of Israel. Our and most of our
subsidiaries directors and officers, as well as certain of the experts named in this
annual report, are non-U.S. residents, and a substantial portion of our assets and the
assets of our directors and officers and of these experts are and will be located outside
the United States. As a result, you may not be able to effect service of process within
the United States upon these persons or to enforce, in U.S. courts, against these persons
judgments of U.S. courts predicated upon any civil liability provisions of the U.S.
federal or state securities laws or other laws of the United States. The United States and
Israel currently do not have a treaty providing for reciprocal recognition and enforcement
of judgments in civil and commercial matters, and there is a doubt as to the
enforceability in original actions in Israeli courts of liabilities based on U.S. federal
securities laws and as to the enforceability in Israeli courts of judgments of U.S. courts
obtained in actions based on the civil liability provisions of U.S. federal securities
laws. Therefore, it may not be possible to enforce those actions against us, our non-U.S.
directors and officers or the experts named in this annual report. However, subject to
certain time limitations, an Israeli court may declare a foreign civil judgment
enforceable if it finds that:

| | the
judgment was rendered by a court which was, according to the laws of the jurisdiction of
the court,      competent to render the judgment;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | the
judgment is no longer subject to appeal;
|- | --------------------------------------------

| | the
obligation imposed by the judgment is enforceable according to the rules relating to the
enforceability      of judgments in Israel and the substance of the judgment is not
contrary to public policy; and
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
judgment can be executed in the country in which it was given.
|- | ------------------------------------------------------------------

A
foreign judgment will not be declared enforceable if it was given in a country whose laws
do not provide for the enforcement of judgments of Israeli courts (subject to exceptional
cases) or if its enforcement is likely to prejudice the sovereignty or security of the
State of Israel. An Israeli court also will not declare a foreign judgment enforceable if
it is proven to the Israeli court that:

| | the
judgment was obtained by fraud;
|- | -----------------------------------

| | there
was no due process;
|- | -------------------------

| | the
judgment was rendered by a court not competent to render it according to the laws of
private      international law in Israel;
|- | ----------------------------------------------------------------------------------------------------------------------------------

| | the
judgment is at variance with another judgment that was given in the same matter between
the same      parties and which is still valid; or
|- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | at
the time the action was brought in the foreign court, a suit in the same matter and
between the same parties was pending before a court or tribunal in Israel.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

iv

---

---



# 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

# Introduction 
Corporate Reorganization

We
conducted an initial public offering (IPO) and concurrent listing on the
NASDAQ National Market of our common shares in March 2005. Prior to the IPO, we were
organized as an agricultural co-operative society (A.C.S.), which is a corporate entity
organized under Israeli law with shares and limited liability for its members. The
principal distinction between an Israeli limited liability company, our current corporate
form, and an A.C.S. is that an A.C.S. is a pass-through tax entity and all the profits and
losses of the A.C.S. are attributed to its shareholders pro rata to their shareholding.
Historically, the articles of association of our A.C.S. reflected the laws and regulations
applicable to such an entity.

Our
A.C.S. was managed under the supervision of a management board that generally consisted of
between four and seven members. Its share capital consisted of 105,506 issued and
outstanding shares with a par value of NIS 1.00 each. The A.C.S. had, immediately prior to
the reorganization, eight shareholders, or members. The following entities
were the members of the A.C.S. (along with their percentage holding in the A.C.S.):
Kibbutz Shamir (16.11%); Shamir Optical Industry (General Partnership) (16.11%); S.L.A.G.
Shamir Plastic Non-Woven Fabrics Industries (Limited Partnership) (16.11%); Shamir
Industries (Limited Partnership) (16.11%); Galil Beehive Products Kibbutz Shamir (Limited
Partnership) (16.11%); FIBI Investment House Ltd. (14.22%); Kibbutz Eyal (3.95%); and
Vision Capital, LLC (1.27%). Kibbutz Shamir directly or indirectly owns Shamir Optical
Industry (General Partnership), S.L.A.G. Shamir Plastic Non-Woven Fabrics Industries
(Limited Partnership), Shamir Industries (Limited Partnership), and Galil Beehive Products
Kibbutz Shamir (Limited Partnership).

On
March 6, 2005 we changed the structure of our company from an A.C.S. into an Israeli
limited liability company. To do so, we relied on a provision of the Israeli Companies Law
that allows such reorganization without having to transfer any assets, rights or
liabilities into a new entity and by using the same entity of the A.C.S. in order to
change its form into a limited liability company, which is not considered as a taxable
event. As part of this reorganization and in preparation for the March 2005 offering, we
adopted new articles of association and restructured our share capital by splitting the
105,506 existing shares so that each share with a par value of NIS 1.00 was divided into
100 common shares with a par value of NIS 0.01 each. In addition, we distributed to our
shareholders out of our equity 2,160,732 new common shares with a par value of NIS 0.01
each. With this distribution, the old shares of the A.C.S. were in effect split at a ratio
of 120.48-to-one, and our total issued and outstanding share capital then amounted to NIS
127,113 consisting of 12,711,332 common shares with a par value of NIS 0.01 each. We also
created authorized share capital of 100,000,000 common shares with a par value of NIS 0.01
each. In addition, as part of this reorganization, the shareholdings held by the various
entities listed above that are owned by Kibbutz Shamir were combined into one entity. As
part of the initial public offering of our common shares, which closed on March 16, 2005,
we issued 3,400,000 new common shares with a par value of NIS 0.01 each, and on July 31,
2005, allocated to Severn 145,182, so that our share capital amounts increased to NIS
162,565 as of the date of this annual report consisting of 16,256,514 common shares with a
part value of NIS 0.01 each. See also Item 10. Additional InformationShare
Capital.

As
part of the reorganization, we also restructured our board of directors, which consisted
of four directors immediately after the reorganization and currently consists of nine
directors, five of whom are independent directors for purposes of the listing standards of
the NASDAQ National Market. We will appoint two of our nine directors to qualify as
external directors in accordance with Israeli law. See Item 6. Directors, Senior
Management and Employees. We also established committees of our board in accordance
with the NASDAQ National Market listing standards at the same time as we appointed the
additional members of our board of directors.

# 3.A SELECTED FINANCIAL
DATA

We
prepare our consolidated financial statements in accordance with accounting principles
generally accepted in the United States (U.S. GAAP). The following data have been derived
from our audited consolidated financial statements as of and for the five years ended
December 31, 2001, 2002, 2003, 2004 and 2005, which have been audited by Kost, Forer,
Gabay & Kasierer, an independent registered public accounting firm and a member firm
of Ernst & Young Global. Our audited consolidated balance sheets as of December 31,
2004 and 2005 and the related audited consolidated statements of income and of cash flows
for each of the three years in the period ended December 31, 2005, together with the notes
thereto, appear elsewhere in this annual report.

1

---

---



You
should read the following selected consolidated financial data in conjunction with the
section of this annual report entitled Item 5. Operating and Financial Review and
Prospects and our consolidated financial statements and the notes thereto included
elsewhere in this annual report.

|                                           | Year Ended December 31,
|------------------------------------------ | -----------------------
|
|
|
|
|(Dollars in thousands)                     |                        
|                                           |                        
|STATEMENT OF OPERATIONS DATA:              |                        
|Revenues, net                              |                        
|Cost of revenues                           |                        
|                                           |                        
|Gross profit                               |                        
|                                           |                        
|Operating expenses:                        |                        
|Research and development                   |                        
|Selling and marketing                      |                        
|General and administrative                 |                        
|Stock-based compensation (1)               |                        
|                                           |                        
|Total operating expenses                   |                        
|                                           |                        
|Operating income                           |                        
|Financial income (expenses) and other, net |                        
|                                           |                        
|Income before taxes on income              |                        
|Taxes on income                            |                        
|                                           |                        
|Income after taxes on income               |                        
|Equity in losses of affiliates, net        |                        
|Minority interest in losses (earnings) of  |                        
|subsidiaries                               |                        
|                                           |                        
|Net income                                 |                        
|                                           |                        
|Pro forma data (unaudited)(2):             |                        
|Pro forma-additional taxes on income       |                        
|                                           |                        
|Pro forma net income(2)                    |                        
|                                           |                        
|Net earnings per share:                    |                        
|Basic                                      |                        
|                                           |                        
|Diluted                                    |                        
|                                           |                        
|Pro forma earnings per share               |                        
|(unaudited) (2):                           |                        
|Basic                                      |                        
|                                           |                        
|Diluted                                    |                        
|                                           |                        
|Weighted average number of shares          |                        
|Basic                                      |                        
|Diluted                                    |                        
|Weighted average shares used for pro       |                        
|forma(2):                                  |                        
|Basic                                      |                        
|Diluted                                    |                        

2

---

---



|                           | As of December 31,
|-------------------------- | ------------------
|
|
|
|
|(Dollars in thousands)     |                   
|                           |                   
|FINANCIAL POSITION DATA:   |                   
|Cash and cash equivalents  |                   
|Working capital            |                   
|Total assets               |                   
|Total liabilities          |                   
|Temporary equity(3)        |                   
|Total debt                 |                   
|Total shareholders' equity |                   

---

| | (1) | Stock-based
compensation includes the following:
| | --- | ------------------------------------------------

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|
|
|
|
|(Dollars in thousands)     |                        
|                           |                        
|Research and development   |                        
|Selling and marketing      |                        
|General and administrative |                        
|                           |                        
|Total                      |                        
|                           |                        

| | (2) | The
pro forma adjustments give effect to our reorganization into an Israeli
               limited liability company (see Corporate Reorganization,               above),
pursuant to which 105,506 shares in our original corporate entity, an
               Israeli agricultural co-operative society (A.C.S.) were converted into
               12,711,332 common shares of Shamir Optical Industry Ltd. As the A.C.S. was
a                pass-through tax entity, the tax liability was not charged to our
company but to                the owners, pro rata to their holding in the A.C.S. For
comparison purposes, we                have included in our financial statements and in
the selected consolidated                financial data in this annual report our pro
forma net income, which reflects                the additional income taxes we would have
paid during the historical periods                presented, assuming we had been a
limited liability company during that time.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Represents
shares of the company owned by Kibbutz Eyal for which Kibbutz Eyal                had a
right to put the shares to us. This put option expired upon the
               reorganization of our company from an A.C.S. to a limited liability
company.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Exchange Rate Data

Our reporting currency is the U.S.
dollar. We generate revenues and incur expenses principally in dollars, euros and NIS. See
also Item 5. Operating and Financial Review and ProspectsFunctional Currency
and Exchange Rate Fluctuations.

The
following table sets out the average exchange rates for these currencies per $1.00 for the
past five fiscal years, based on the exchange rates published by the Bank of Israel:

|Currency | 2001 | 2002 | 2003 | 2004  | 2005
|-------- | ---- | ---- | ---- | ----- | ----
|
|
|
|
|EUR      |      |      |      | 1.122 |     
|NIS      |      |      |      | 4.206 |     

On
June 15, 2006 the exchange rate was NIS4.460 per $1.00 and  0.792 per $1.00, as
reported by the Bank of Israel.

# Market Data

This
annual report contains information, statistical data and predictions about our industry
and the size of our markets. We operate in an industry in which it is difficult to obtain
precise industry and market information. We are not aware of any exhaustive industry and
market reports from public sources or industry umbrella organizations. The data contained
in Item 4. Information on the CompanyIndustry Overview and certain other
market data in this annual report is derived from an industry study that we commissioned
from Strategy With Vision Ltd. (SWV), a U.K. consulting firm to the eyewear
and eye care industries, for the year 2005. In compiling the data for this study, SWV
relied on published figures and on data it compiled from various participants in the
industry. To calculate market size and value, SWV used estimates from companies that are
active in the relevant markets, net selling prices of lens manufacturers and its own
estimates of optical retail mark-ups. We believe that the industry and market information
contained in the annual report provides fair and accurate estimates of the size of our
markets.

# 3.B CAPITALIZATION AND
INDEBTEDNESS

Not applicable

# 3.C REASONS FOR THE
OFFER AND USE OF PROCEEDS

Not applicable.

3

---

---



# 3.D RISK FACTORS

The
following risk factors should be read carefully in connection with evaluating our business
and the forward-looking statements contained in this Form 20-F. Any of the following risks
could materially adversely affect our business, our operating results, our financial
condition and the actual outcome of matters as to which forward-looking statements are
made in this report. The risks described below do not purport to be exhaustive and these
risks do not constitute the only risks to which we are exposed. The order in which the
individual risks are presented does not provide an indication of the likelihood of their
occurrence nor of the severity or significance of the individual risks.

# Risks Relating to Our
Business and the Ophthalmic Industry

The industry in which we
operate is highly competitive, and these competitive pressures may harm demand for our products.

Competition
in our industry is intense, and we expect competition to increase. New products are
introduced frequently, and we compete primarily on the basis of innovation, quality and
breadth of product offerings, customer service and price.

Many
of our main competitors are significantly larger than we are and have significantly
greater financial and human resources than we do. They also have greater technical,
product development and marketing resources and are more established and enjoy greater
market recognition than we do. As a result, these competitors benefit from greater
economies of scale and may be able to develop products or services that are more effective
than ours and to respond more quickly to new or emerging technologies or changes in
customer requirements. They compete with us in some cases by offering lower prices or
devoting greater resources to product marketing than we do. Price competition in our
industry is often severe and may result in lower prices or reduced demand for our products
and a corresponding reduction in our gross margins, which would, in turn, impair our
ability to maintain profitability.

Certain
of our competitors also have more developed and substantial direct customer bases than we
have and may be able to fund significant direct sale efforts as well as more product
development and acquisition efforts. A number of our principal competitors are vertically
integrated with optical laboratories to a greater extent than we are. This integration may
limit the number of independent optical laboratories to which we can market our products
and may limit the amount of purchases of our products by these laboratories. In addition,
within a particular market, certain of our competitors may enjoy a
home-country advantage over foreign competition, and we may also face
additional competition if new participants enter the markets in which we operate. The
development and successful introduction by a competitor of products or services that are
superior in performance to or lower in price than ours could adversely affect our ability
to effectively compete in the marketplace for optical lenses.

We rely on optical
laboratories in various geographic markets to purchase, market and sell our products
worldwide. If we are unable to maintain or expand our relationships with these
laboratories, it could have a material adverse effect on the sales and distribution of
our products.

We
rely on optical laboratories in the different geographic markets in which we operate to
purchase our products from us or to distribute our products to the end-user on our behalf.
The number, size, business strategy and operations of these laboratories vary widely from
market to market. The success of our sales and distribution channels depends heavily on
our successful cooperation with these laboratories in each of our various markets.

The
U.S. ophthalmic market is characterized by a large number of laboratories, many of which
are independent, as well as large national retail chains and buying groups, some of which
own their own laboratories. We currently distribute most of our products directly to
independent laboratories in the United States. We have not yet established a significant
relationship with any national retail chain or buying group. If a large number of the
independent laboratories in the United States cease to be independenteither because
they are acquired by competitors or national retail chains or for any other reasonwe
may not be able to sell our products to these laboratories., If we do not develop
relationships with national retail chains or buying groups, our sales in the United States
could decline .Each of these factors could have a significant adverse impact on our sales
and our results of operations.

The
European ophthalmic market, relative to the U.S. market, has a small number of optical
laboratories, of which only a few are still unaffiliated with lens manufacturers or retail
chains. Most of the major optical laboratories in Europe are owned by our competitors.
Although we also sell our products in Europe through laboratories owned by our
competitors, there is a risk that we may lose some of our existing customers and that our
sales to European laboratories will significantly decrease if (i) we are unsuccessful in
purchasing any of the remaining independent laboratories, (ii) there is further
consolidation among laboratories in Europe, (iii) we are unsuccessful in establishing our
own laboratory, or (iv) laboratories owned by our competitors cease to purchase our
products.

4

---

---



A significant portion of our
business is conducted outside of Israel and the United States, and we intend to continue
to expand our operations internationally. As a result, we are subject to a number of risks
associated with our foreign operations.

We
derive substantially all of our revenues from sales outside of Israel and a significant
majority from sales outside of Israel and the United States. During 2005 we generated
approximately 66.6% of our revenues from sales outside of Israel and the United States,
including 57.7% in Europe. We also sell our products in Australia, Canada, South Africa,
South America, and China and other countries in East and South-East Asia. An integral part
of our expansion strategy is to enter new foreign markets, principally in China and other
Asian countries, and to further penetrate those foreign markets in which we are currently
active. Our ability to penetrate certain international markets may be limited, and our
international sales and operations and our expansion strategy are subject to numerous
risks inherent in international business activities, including:

| | developments
in the political and economic environment of some foreign countries, primarily in Asia
and South America, that have an adverse effect on our operations in those countries,
including the fact that customers in some jurisdictions may not do business with an
Israeli company;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
imposition of tariffs or exchange controls, technology export license requirements or
other trade      restrictions;
|- | ------------------------------------------------------------------------------------------------------------------------

| | difficulty
in managing a large organization spread through various countries, including staffing and
     managing foreign operations;
|- | --------------------------------------------------------------------------------------------------------------------------------------

| | difficulty
enforcing agreements and collecting receivables through certain foreign legal systems, in
particular in developing markets in Asia and South America;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | longer
payment cycles for foreign customers than for customers in the United States;
|- | ------------------------------------------------------------------------------------

| | currency
exchange risks, in particular between the dollar and the NIS and the dollar and the euro;
|- | --------------------------------------------------------------------------------------------------

| | difficulties
in complying with a variety of foreign laws and regulations;
|- | -------------------------------------------------------------------------

| | tax
rates in certain foreign countries that exceed those in Israel, and withholding
requirements on foreign      earnings;
|- | --------------------------------------------------------------------------------------------------------------------------

| | greater
difficulty in safeguarding intellectual property in certain jurisdictions, in particular
in China      and other Asian countries; and
|- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | difficulties
in adapting our products to different country-specific requirements.
|- | ---------------------------------------------------------------------------------

These
and other factors could have a material adverse effect on our international operations or
our business as a whole. As we continue to expand our business globally, our success will
increasingly depend on our ability to effectively manage these risks.

If we do not continually
enhance our existing products and develop and market new products, our product portfolio may
become obsolete and we may not achieve broad market acceptance and brand recognition.

The
market for spectacle lenses and lens designs is characterized by:

| | rapid
technological change;
|- | ---------------------------

| | short
product life cycles and frequent product introductions and enhancements;
|- | ------------------------------------------------------------------------------

| | evolving
industry performance standards; and
|- | --------------------------------------------

| | changes
in customer and end-user requirements.
|- | ----------------------------------------------

Any
one of these factors could reduce the demand for our products or require us to expend
substantial resources for research, design and development of new products and
technologies to avoid technological or market obsolescence. Our success will depend on our
ability to continually enhance our existing products and develop or acquire and market new
products in an effort to maintain and increase sales and to improve our gross margins. We
cannot assure you that we will have sufficient financial resources or otherwise be able to
develop the technological advances necessary for us to remain competitive or that any new
products that we develop will be accepted in the marketplace, either at all or on a timely
basis or at competitive prices. Any delay or failure by us to respond to these market
conditions or to technological advances by our competitors would have a material adverse
effect on our business, operating results and financial condition.

5

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We compete against
alternative technologies and treatments that provide a substitute for spectacle lenses.

Spectacle
lenses compete with other methods of vision correction, including laser surgery and
contact lenses. Some of these technologies currently offer limited competition to our
progressive lens products, our most significant products in terms of sales. See Item
4. Information on the CompanyIndustry OverviewLenses and Alternatives.
As alternative technologies evolve in the future, they may decrease demand for spectacle
lenses and progressive lenses, which would have a material adverse effect on our sales and
results of operations.

We depend on our manufacturing
facilities in Israel. An interruption of manufacturing at these facilities for any reason
could have a material adverse effect on our results of operations.

A
significant portion of the development and manufacturing of our products is concentrated
at our two manufacturing facilities in Israel. Raw materials and finished product
inventories are also stored at these facilities. Although these facilities are in two
separate locations, a disruption of our operations at or damage to either of these
facilities, whether as a result of fire, natural disaster, act of war, terrorist attack or
otherwise, could materially affect our ability to deliver products on a timely basis and
could materially adversely affect our results of operations. While we have not experienced
any such disruption or damage in the past, we cannot assure you that such disruption or
damage will not occur in the future. We have insured the portion of our product
inventories stored in these two facilities against loss from any such disruption or
damage. See also Risks Relating to our Operations in Israel.

Our proprietary
technology is difficult to protect. Unauthorized use of our proprietary technology by
third parties may impair our ability to compete effectively.

Our
success and ability to compete within the ophthalmic industry depend in large part on our
ability to protect our proprietary technology. To do so, we currently rely on a
combination of patent protection for our technologies and products, trade secret and
intellectual property laws, nondisclosure and other contractual agreements, and other
technical measures to protect our proprietary rights and maintain the confidentiality of
key business and manufacturing processes. We seek to defend and enforce our rights against
infringement and to operate without infringing the proprietary rights of others.

The
validity and breadth of claims in patent applications for ophthalmic technology or
processes involve complex legal and factual questions and may therefore be highly
uncertain. We cannot assure you that:

| | patent
authorities will not grant patents based on applications our competitors have filed or
may file;
|- | -------------------------------------------------------------------------------------------------------

| | the
scope of any patent protection we receive will exclude competitors or provide us with
competitive advantages;
|- | -----------------------------------------------------------------------------------------------------------------

| | any
of the patents that have been or may be issued to us will be held valid if subsequently
challenged; or
|- | ----------------------------------------------------------------------------------------------------------

| | others
will not claim rights in or ownership of the patents and other proprietary rights that we
hold.
|- | ------------------------------------------------------------------------------------------------------

Furthermore,
we cannot assure you that others have not developed or will not develop similar products
or technologies, duplicate any of our products or technologies, or design around any
patents that have been or may be issued to us. In many countries patent applications
remain confidential until the issuance of a patent. We cannot be certain, therefore, that
others have not filed earlier applications for inventions covered by our pending patent
applications, nor can we be certain that we will not infringe any patents that may be
issued to others on such applications.

Certain
of our employees and consultants are subject to confidentiality undertakings in favor of
the company, and we also seek these undertakings from some suppliers and customers.
However, not all of our employees or suppliers and customers are subject to these
undertakings, and even where they are, these measures may not be sufficient to protect our
technology from third-party infringement or misappropriation. There can be no assurance
that our counterparties will not breach these agreements, and we may not have adequate
remedies for any breach. In addition, our competitors may learn of our trade secrets
through other methods. Intellectual property law protection may be insufficient to
safeguard our proprietary information, and our products may be sold in countries that
provide less protection to intellectual property than the United States, Europe or Israel,
or no protection at all. These countries include, in particular, China, Thailand,
Singapore and other Asian countries in which we do or intend to do business. If any third
parties infringe our proprietary technology rights, this infringement could have a
material adverse effect on our competitive position.

6

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Our business may suffer
if we are involved in disputes or protracted negotiations regarding our intellectual property
rights or the intellectual property rights of third parties.

We
are subject to the risk of adverse claims and litigation alleging infringement by us on
the intellectual property rights of others. There is an increasing number of patents and
patent applications in our industry. Third parties may assert infringement claims in the
future, alleging infringement by our current or future products or applications. For
example, we have been notified by two companies that they believe that certain of our
products infringe patents claimed by those companies. See Item 8. Financial
InformationLegal Proceedings.

We
may institute or otherwise be involved in litigation to protect our registered patents
and/or trade secrets or know-how, challenge the validity of proprietary rights of others
or defend against alleged infringement by us of proprietary rights of others. This type of
litigation is costly and diverts managements attention from its day-to-day
responsibilities of running our business. In addition, an adverse determination in such
litigation could:

| | limit
the value of our trade secrets or know how;
|- | -------------------------------------------------

| | subject
us to significant liabilities to third parties;
|- | -------------------------------------------------------

| | require
us to seek licenses from third parties; or
|- | --------------------------------------------------

| | prevent
us from manufacturing and selling products,
|- | ---------------------------------------------------

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

We are a company focused
on research and development, and we cannot assure you that our research and development efforts
will result in new products or product enhancements that will receive the market
acceptance and demand that we expect.

We
have a strong focus on research and development (R&D), and the success of our business
depends substantially on the results of our R&D activities. We conduct R&D both to
enhance our existing proprietary technologies and to develop new technologies. We cannot
assure you that our R&D efforts will result in product enhancements or new products,
or that there will be a market for products related to or based on these new concepts. The
success of our R&D efforts depends on the availability of funds as well as on the
timely completion of our R&D projects. If we fail to provide the necessary funds to
complete our various R&D projects or if we miss our target deadlines, we may lose a
competitive advantage of being the first to market. In addition, our competitors that have
greater financial resources to commit to R&D efforts may be able to leap
frog our technological innovations with their own technological innovations and make
our innovations obsolete even before we introduce them to market. In addition, some of the
agreements pursuant to which we provide design services restrict our ability to offer
products with certain qualities that exceed those designed for the customer who is party
to the agreement, which may limit our ability to market new product developments outside
of those relationships. Our investment of human and financial resources in R&D is
therefore highly risky with no guarantees of any development success or investment return.

We
also provide design and manufacturing services to producers, distributors and wholesalers
of lenses in accordance with specifications defined by such producers, distributors and
wholesalers. Though we are usually compensated for this development work, this
compensation is primarily in the form of royalties and depends on the ability of these
producers, distributors and wholesalers to sell these products. Their failure to do so may
adversely affect our results.

We have experienced a
period of rapid growth, and if we cannot adequately manage our growth, our results of operations
will suffer.

Over
the past several years, we have experienced rapid growth in our business. Our anticipated
future growth may place a significant strain on our managerial, research and development,
technical, administrative, operational, financial and marketing resources. We cannot
assure you that we have adequately considered all costs and risks associated with our
expansion, or that our systems, procedures and managerial controls will be adequate to
support our expanded operations. See We have not yet evaluated our internal
control over financial reporting in compliance with Section 404 of the Sarbanes-Oxley
Act. If our systems, procedures or controls prove inadequate to support our
operations, we may be unable to achieve our goals for growth. Our growth may also require
us to hire additional research, engineering, technical support, sales, accounting,
administrative and operational personnel and competition for qualified personnel may be
intense. We anticipate incurring expenses before realizing a commensurate increase in
sales. Failure to manage our future growth effectively could result in
higher-than-anticipated costs and lower-than-anticipated sales and could have a material
adverse effect on our operating results and financial condition.

7

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We intend to continue our
policies of acquisitions and of establishing joint ventures with local strategic partners. Pursuing
these polices could divert our resources, create unanticipated expenses, disrupt our
business and adversely affect our financial condition.

Part
of our expansion strategy is to pursue acquisitions of other businesses, in particular
laboratories, establish joint ventures and acquire complementary businesses or
technologies. Negotiating potential acquisitions or joint ventures as well as integrating
newly acquired or jointly developed businesses, products or technologies into our
operations could divert our managements attention from other business matters and
could be expensive and time-consuming. We cannot assure you that we will be successful in
integrating acquired businesses, laboratories or technologies or in establishing joint
ventures or that we will be able to realize the intended sales and cost benefits of the
acquisition or joint venture.

In
addition, future acquisitions could require substantial cash expenditures and could result
in customer or distributor dissatisfaction, including with respect to independent
laboratories that may view our ownership of laboratories in their respective jurisdictions
as competitive. We may also experience performance problems with an acquired company,
suffer a decrease in our profit margins or incur debt and contingent liabilities from the
acquired businesses. In addition, we may issue equity securities in the context of an
acquisition that could cause dilution to our existing shareholders at the time, and we may
incur impairment charges related to goodwill and amortization of intangibles (such as
intellectual property). Likewise, we may write off in-process research and development
that we no longer wish to continue to fund. Any of these factors could harm our business,
financial condition and results of operations.

We depend on third parties and
non-wholly-owned subsidiaries for various parts of our business operations, including
research and development and sales. If our relationships with these third parties end or
deteriorate, it would have a material adverse effect on our business and results of
operations.

We
rely on third parties for certain aspects of our research and development activities and
on non-wholly-owned subsidiaries for certain parts of our foreign operations. We are also
currently making efforts to position ourselves with national retail chains, optical retail
stores and national retail buying groups who, we believe, will make up a growing part of
the distribution of spectacle lenses.

We
have minority partners in some of our foreign subsidiaries that contribute significantly
to our sales and profitability. These minority partners may object to our management of
the subsidiaries, and their consent is required for certain matters regarding their
operations, including resolutions that contradict specific existing agreements, issuances
of shares, and transactions with related parties (including us) or other transactions
outside the ordinary course of business. Dividends and other payments to us from
subsidiaries in certain jurisdictions are subject to legal restrictions and may have
adverse tax consequences to us. In addition, these payments or loans are contingent on the
results of operations of the particular subsidiaries and are subject to various business
considerations.

We
have an exclusive arrangement with Altra GmbH (Altra), a distributor in Europe
of which we own 51%, and with Shamir Insight Inc., a distributor in the United States of
which we own 90% as of September 30, 2005, of this annual report. Sales in Europe through
Altra and in the United States through Shamir Insight accounted for approximately 77.7% of
our total sales in 2005. Should these distributors not perform to our expectations or
should other distributors provide vendors or end-users with better incentives than Altra
or Shamir Insight, our sales will suffer, which will have a direct and adverse impact on
our financial condition and results of operations.

We are dependent on a
small number of suppliers for raw materials.

Most
of the raw materials used in the manufacture of lenses, including our products, are
available from a limited number of suppliers. There are currently less than five suitable
suppliers of blanks for glass lenses and a similar number of suitable suppliers of
monomers for plastic lenses. We purchase our raw materials from some of these suppliers.
The loss of any one of these suppliers, or a significant decrease in the supply of glass
blanks or monomers, would require us to obtain these raw materials elsewhere. In addition,
because the raw materials market is dominated by a small number of suppliers, there is the
risk of a price cartel or monopoly. Because these few suppliers offer their supplies for
comparable prices, the only way to achieve cost savings in supplies may be to purchase
supplies in bulk. Our larger competitors may be able to purchase more supplies at any
given time than we are and may therefore achieve lower prices for their supplies than we
do. See The industry in which we operate is highly competitive, and these
competitive pressures may harm demand for our products. If we are unable to obtain
glass blanks or monomers from our suppliers (or alternative suppliers) at acceptable
prices, we may realize lower margins and experience difficulty in meeting our
customers requirements.

We may not be able to
continually reduce manufacturing costs for our products.

Prices
for certain of our products come under pressure, in particular when such products become
available from a comparatively large number of suppliers with little product
differentiation. To maintain or strengthen our competitive position for these products
within the ophthalmic industry, we must continually reduce our product manufacturing
costs. In addition to normal cost reduction activities, we have initiated product
migration and standardization activities and reduced the number of people employed to
manufacture and market such products world-wide. These reductions are necessary to help
offset price decreases, inflationary pressures and changes in product and regional mix. To
the extent our cost reduction activities are unsuccessful, in part or in full, our ability
to compete may be significantly impacted and our profit margin may be reduced.

8

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Our operating results may
fluctuate on a periodic basis, which could cause us to fail to meet expectations for a given
period and result in a decline in the trading price of our shares.

Our
results of operations may fluctuate significantly in the future on a quarterly and an
annual basis due to a number of factors, many of which are beyond our control. These
factors include:

| | variations
in the timing of orders and shipments of our products and services;
|- | ------------------------------------------------------------------------------

| | variations
in the demand from and the size of orders by our customers;
|- | ----------------------------------------------------------------------

| | the
timing and success of new product or technology introductions by us or our competitors;
|- | -------------------------------------------------------------------------------------------

| | the
pricing and profitability of our products or the timing of aggressive low-pricing
policies by our competitors;
|- | ------------------------------------------------------------------------------------------------------------------

| | changes
in the availability or cost of raw materials;
|- | -----------------------------------------------------

| | seasonal
variations in customer spending in Europe and the United States;
|- | -------------------------------------------------------------------------

| | the
timing of technological innovations for our products or those of our competitors;
|- | -------------------------------------------------------------------------------------

| | our
ability to bring new products into volume production efficiently;
|- | ---------------------------------------------------------------------

| | shifts
in market and industry emphasis and end-user demands; and
|- | ----------------------------------------------------------------

| | market
conditions in the ophthalmic industry and in the economy as a whole.
|- | ---------------------------------------------------------------------------

These
factors complicate our planning processes and reduce the predictability of our earnings.
This problem is particularly acute for us because of our relatively small size and the
dynamics of the industry and markets in which we operate. Fluctuations in our quarterly
results could cause us to fail to meet expectations (either our own or those of securities
analysts) for the relevant period and could cause the trading price of our shares to
decline. Therefore, period-to-period comparisons of our results of operations may not be
meaningful, and you should not rely on them as indications of our future performance.

We depend on a limited
number of key personnel. If we lose the services of these individuals, our business may be adversely
affected.

Our
continued growth and success depend to a large extent on the services of, among others,
certain of our senior personnel, in particular our Chief Executive Officer, Giora
Ben-Zeev, and our Chief Engineer, Dan Katzman. We also depend to some extent on certain of
our sales staff, as well as on researchers with whom we have consulting arrangements. If
any of these key personnel should leave our employ or if these consultants should
terminate their relationship with us, we may be unable to locate and recruit sufficient
replacement personnel without undue delay or additional cost or at all. Any such delay or
inability could delay or terminate some or all of our development programs or the
commercialization of our products. Even if we are able to attract suitable replacement
personnel, to the extent that the process of educating new personnel in our technologies,
in the needs of the ophthalmic industry and in our company culture requires a certain
transition period, we may incur delays with respect to the further developments of our
products. The implementation of our business strategy and our future success will also
depend in large part on our continued ability to attract and retain other highly qualified
scientific, technical and management personnel.

We generate a significant
portion of our revenues and expenses in currencies other than the dollar. As a result, our
results of operations may be adversely affected by currency fluctuations.

We
operate globally, and our financial results are subject to both transaction and
translation effects resulting from fluctuations in currency exchange rates. We generate
our revenues primarily in euros and dollars, and we incur a significant portion of our
expenses, principally salaries and related expenses of our staff in Israel, in NIS. In
2005 we generated approximately 39% of our revenues in dollars and 54% in euros, and we
incurred approximately 19% of our expenses in NIS, 27% in dollars and 48% in euros.
Exchange rate fluctuations between the dollar and the euro materially impact our revenues,
cost of revenues and other operating expenses. See Item 5. Operating and Financial
Review and ProspectsFunctional Currency and Exchange Rate Fluctuations. We
currently do not significantly hedge our currency exposure through financial instruments.

9

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One
currency exchange risk we face is translation risk. In preparing our consolidated
financial statements, we convert the results from operations outside the dollar zone into
dollars at the average rate for each fiscal quarter. As a result, a strong decline in the
value of the euro compared to the dollar will have a negative impact on our sales
revenues, while an increase in the value of the NIS or euro to the dollar will have a
negative impact on our expenses.

We
are also exposed to transaction risk when our sales are denominated in currencies that are
different from those in which we purchase raw materials or incur production costs. If the
value of the currency in which the purchase price is denominated declines relative to the
currency in which we incur our costs, the profit margin for the transaction will be
reduced.

We have not yet evaluated
our internal control over financial reporting in compliance with Section 404 of the Sarbanes-Oxley Act.

We
are required to comply with the internal control evaluation and certification requirements
of Section 404 of the Sarbanes-Oxley Act by no later than the end of our 2007 fiscal year,
because we expect that our worldwide public float will be less than $75.0 million as of
June 30, 2006. We have only recently begun the process of determining whether our existing
internal control over our financial reporting systems is compliant with Section 404. This
process may take up to twelve months to complete. If it is determined that we are not in
compliance with Section 404, we may be required to implement new internal control
procedures and reevaluate our financial reporting. We may experience higher than
anticipated operating expenses as well as outside auditor fees during the implementation
of these changes and thereafter. Further, we may need to hire additional qualified
personnel in order for us to be compliant with Section 404. If we are unable to implement
these changes effectively or efficiently, it could harm our operations, financial
reporting or financial results and could result in our being unable to obtain an
unqualified report on internal controls from our independent registered public accounting
firm.

# Risks Related to Our
Relationship with Kibbutz Shamir

Kibbutz Shamir is our
controlling shareholder, and its interests may conflict with those of other investors.

Following
the initial public offering of our common shares on March 10, 2005, and several share
purchases up to June 15, 2006, our majority shareholder, Kibbutz Shamir, holds 58.72% of
our outstanding shares. As a result, this single shareholder has sufficient voting power
to effectively control all matters concerning our company that require shareholder
approval. For example, Kibbutz Shamir may have the power to affect our legal and capital
structure; to elect all of our directors; to prevent or effect changes in our control or
management; to approve or reject changes to our operations or strategic direction; to
amend our Articles of Association and change the rights attached to our shares; and to
determine whether we may enter into mergers or other business combination transactions in
which shareholders could receive a premium over the prevailing market price for our
shares. Kibbutz Shamir has contractually agreed with another shareholder to vote for that
shareholders nominee for membership on our board. See Item 7. Major
Shareholders and Related Party Transactions.

In
addition, as part of a working services agreement between us and Kibbutz Shamir, we have
an obligation to give Kibbutz Shamir the first opportunity to provide us with workers for
any vacant position in our company specified in the agreement. Kibbutz Shamir also has a
right of first refusal to provide us with certain services as part of a services agreement
between us and Kibbutz Shamir. Furthermore, we have entered into a sublease agreement with
Kibbutz Shamir that is subject to the terms of the long-term lease agreement between
Kibbutz Shamir and the Israel Lands Administration (ILA). Pursuant to the
sub-lease, we granted Kibbutz Shamir a right of first refusal to carry out any
construction work on the property that we lease under the sublease agreement. Pursuant to
the underlying long-term lease agreement with the ILA, the ILA may cancel the lease in
certain circumstances, including if Kibbutz Shamir commences proceedings to disband or
liquidate, or in the event that Kibbutz Shamir ceases to exist in the form of a
kibbutz, as defined in the lease. In addition, our sub-lease agreement with
Kibbutz Shamir depends upon Kibbutz Shamir maintaining control of us. If Kibbutz Shamir
were to cease to control us, we could be required to renegotiate our lease agreements and
obtain certain approvals from the ILA. For more information with respect to these
agreements, see Item 7. Major Shareholders and Related Party Transactions.

In
these and other circumstances, Kibbutz Shamirs interests may conflict with those of
other investors, and other investors may be unable to prevent Kibbutz Shamir from acting
in conflict with their interests.

Our agreements with
Kibbutz Shamir may be less favorable to us than if they had been negotiated with
unaffiliated third parties.

Our
headquarters and certain manufacturing facilities are located on the premises of Kibbutz
Shamir, which is our majority shareholder. We have entered into certain agreements with
Kibbutz Shamir pursuant to which Kibbutz Shamir provides us with, among other things,
office facilities, workers to fill certain positions within our company, administrative
services, the operation and administration of our information systems operations, security
and facilities maintenance, and other services. While these agreements have been
negotiated on an arms length basis, they may contain terms that are different from
the terms that would have been included had these agreements been negotiated with
unaffiliated third parties. See Item 7. Certain Relationships and Related Party
Transactions.

10

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Our directors and
executive officers who are members of Kibbutz Shamir may have conflicts of interest with
respect to matters involving the company.

Certain
of our directors, officers and key employees are members of Kibbutz Shamir, which is our
majority shareholder. Some of these individuals are also members of the management board
of Kibbutz Shamir. These persons will have fiduciary duties to both us and Kibbutz Shamir.
As a result, they may have real or apparent conflicts of interest on matters affecting
both us and Kibbutz Shamir and in some circumstances may have interests adverse to ours.
Currently, two members of our board of directors, including our chief executive officer,
and two other executive officers are members of Kibbutz Shamir and members of Kibbutz
Shamirs management board. One of these board members is also the chairman of the
management board of Kibbutz Shamir. In addition, another member of our board of directors,
who is not a member of Kibbutz Shamir, also serves on the management board of Kibbutz
Shamir. See "Item 6.  Directors, Senior Management and Employees."

# Risks Related to Our
Shares

The trading price of our
shares may fluctuate substantially.

The
trading price of our shares is likely to be highly volatile and subject to wide
fluctuations. Factors that could affect the trading price of our shares include:

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

| | actual
or anticipated variations in our operating results or a variance in our financial
performance from      the expectations of market analysts;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | announcements
of technological innovations, new products or product enhancements, strategic alliances
or      significant agreements by us or by our competitors;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | conditions
and trends in the end markets we serve and changes in the estimates of the sizes and
growth      rates of these markets;
|- | -----------------------------------------------------------------------------------------------------------------------------------

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

| | changes
in our pricing policies or the pricing policies of our competitors;
|- | ---------------------------------------------------------------------------

| | changes
in the estimates of our operating results or changes in recommendations by any securities
analysts      that elect to follow our common shares;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | changes
in market valuation or earnings of our competitors;
|- | -----------------------------------------------------------

| | changes
in legislation;
|- | -----------------------

| | the
trading volume of our shares; and
|- | -------------------------------------

| | market
conditions in our industry, the industries of our customers and the economy as a whole.
|- | ----------------------------------------------------------------------------------------------

If
our future quarterly or annual operating results are below the expectations of securities
analysts or investors, the price of our shares would likely decline. Share price
fluctuations may be exaggerated if the trading volume of our shares is limited.

In
addition, the stock market in general, and the NASDAQ National Market in particular, have
experienced substantial price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of particular companies affected. These
broad market and industry factors may materially harm the market price of our common
shares, regardless of our operating performance. In the past, following periods of
volatility in the market price of a companys securities, securities class-action
litigation has often been instituted against that company. Such litigation, if instituted
against us, could result in substantial costs and a diversion of managements
attention and resources, which could materially harm our business, financial condition,
future results and cash flow.

11

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Future sales of our
shares could adversely affect the market price of our shares.

Those
of our shareholders who held shares prior to the initial public offering of our common
shares on March 10, 2005, hold approximately 73.53% of our outstanding shares as of June
15, 2006. These shareholders are not contractually prohibited from transferring our shares
See Item 7. Major Shareholder and Related Party Transactions. Any sale by us
or our pre-offering shareholders of our shares into the public market, or the perception
that sales could occur, could adversely affect the prevailing market price for our shares.

All
of our current shareholders who held shares prior to the March 2005 offering have the
right, subject to some limited conditions, to demand that we file a registration statement
on their behalf to register their shares or that we include their shares in a registration
statement that we file on our behalf or on behalf of other shareholders. See Item
10. Additional Information  Shares Eligible for Future Sale  Registration
Rights Agreement.

Provisions of our
Articles of Association and Israeli law could inhibit the acquisition of us by others.

Provisions
in our Articles of Association may make it difficult and expensive for a third party to
pursue a tender offer or a change in control or takeover attempt that our management and
board of directors oppose. Public shareholders that might desire to participate in one of
these transactions may not have an opportunity to do so. For example, our Articles of
Association contain provisions:

| | establishing
advance notice requirements for director nominations or other proposals at shareholder
meetings;
|- | -------------------------------------------------------------------------------------------------------------

| | generally
requiring the affirmative vote of holders of at least 75% of the voting power of our
outstanding voting shares to amend any provision in our Articles of Association, which
could make it more difficult for a third party to remove the provisions we have included
to prevent or delay a change of control; and
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | providing
for staggered terms for the members of our board of directors.
|- | ------------------------------------------------------------------------

These
anti-takeover provisions could substantially impede the ability of public shareholders to
benefit from a change in control or to change our management and board of directors.

Some
provisions of Israeli corporate law may also have the effect of delaying, preventing or
making more difficult a merger with, or acquisition of, us. In addition, Israeli tax law
treats some acquisitions, such as stock-for-stock exchanges between an Israeli company and
a foreign company, less favorably than U.S. tax laws. See Item 10. Additional
InformationShare Capital and Israeli Taxation.

# Risks Relating to Our
Operations in Israel

Conducting business in
Israel entails special risks.

Our
headquarters and main research and development and manufacturing facilities are located in
the State of Israel, in an area close to its border with Lebanon, and our key employees,
our officers and our directors are residents of Israel. Although most of our sales are
made to customers outside Israel, we are nonetheless directly influenced by the political,
economic and military conditions affecting Israel. Specifically, we could be materially
and adversely affected by:

| | any
major hostilities involving Israel;
|- | ---------------------------------------

| | a
full or partial mobilization of the reserve forces of the Israeli army;
|- | -------------------------------------------------------------------------

| | the
interruption or curtailment of trade between Israel and its present trading partners; or
|- | --------------------------------------------------------------------------------------------

| | a
significant downturn in the economic or financial condition of Israel.
|- | ------------------------------------------------------------------------

Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its Arab neighbors, and a state of hostility, varying from time
to time in intensity and degree, has led to security and economic problems for Israel.
There is no indication as to how long the current hostilities will last or whether there
will be any further escalation. Any continuation of or further escalation in these
hostilities or any future armed conflict, political instability or violence in the region
may have a negative effect on our business condition, harm our results of operations and
adversely affect our share price. Furthermore, there are a number of countries, primarily
in the Middle East, as well as Malaysia and Indonesia, that restrict business with Israel
or Israeli companies, and we are precluded from marketing our products to these countries.
Restrictive laws or policies directed toward Israel or Israeli businesses may have an
adverse impact on our operations, our financial results or the expansion of our business.

12

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

Many
of our officers and employees in Israel, including certain key employees, are obligated to
perform annual reserve duty in the Israeli army and are subject to being called up for
reserve duty at any time. The obligation to perform compulsory military reserve service on
an annual basis extends up to a maximum age of 54 for most male Israeli citizens. The
absence of one or more of our officers and key employees for significant periods of time
due to military service could be disruptive to our operations.

The Israeli government programs
and tax benefits in which we have participated in the past and in which we currently
participate or from which we receive benefits require us to meet several conditions. These
programs or benefits may be terminated or reduced in the future, which could increase our
costs.

We
benefit from certain Israeli government programs and tax benefits, particularly from tax
exemptions and reductions resulting from the status of our manufacturing facilities in
Israel (see Item 10. Additional InformationTaxationIsraeli
Taxation.). To be eligible for these programs and tax benefits, we must continue to
meet certain conditions, including making specified investments in fixed assets and
equipment and financing a percentage of those investments with our share capital. If we
fail to meet such conditions in the future, these tax benefits could be cancelled or
reduced, and we could be required to refund those tax benefits already received, adjusted
for inflation and with interest. These programs and tax benefits may not be continued in
the future at their current levels or at all, and our requests for future participation in
these programs for any future expansion of our manufacturing facilities may not be
approved. In recent years, the Israeli government has reduced the benefits available under
these programs (among other things, by shortening the tax moratorium in certain geographic
areas of the country), and Israeli governmental authorities have indicated that the
government may in the future reduce or eliminate the benefits of these programs. Further
changes in the policy of the Israeli Government in particular, and the termination or
reduction of these programs and tax benefits specifically, could increase our tax rates,
thereby reducing our net profits or increasing our net losses, or otherwise materially
adversely affect us.

In
addition, in March 2005 the law governing these tax benefits was amended to revise the
criteria for investments that qualify for tax benefits as an approved enterprise. See
Item 10. Additional InformationTaxationIsraeli
Taxation.

It may be difficult to
enforce a U.S. judgment against us, our officers and directors and some of the experts
named in this annual report or to assert U.S. securities law claims in Israel.

We
are incorporated in Israel. Our executive officers and directors are nonresidents of the
United States, and a substantial portion of our assets and the assets of these persons is
located outside the United States. Therefore, service of process upon any of our officers
and directors may be difficult to effect in the United States. Furthermore, it may be
difficult to enforce a judgment obtained in the United States against us or any of these
persons, including one based on the civil liability provisions of the U.S. federal
securities laws, in both U.S. and non-U.S. courts.

Additionally,
it may be difficult for investors to assert U.S. federal securities laws claims or to
enforce civil liabilities under U.S. federal securities laws in actions originally
instituted in Israel. For more information regarding the enforceability of civil
liabilities against us, our directors and our executive officers, please see
Enforceability of Civil Liabilities.

ITEM 4. INFORMATION ON THE COMPANY

# 4.A HISTORY AND
DEVELOPMENT OF THE COMPANY

We
began our activity as a limited partnership in the early 1970s as a manufacturer of
bifocal lenses. During the first half of the 1980s, we began to develop our own
progressive lens. In the mid-1980s, we began to produce and market progressive glass
lenses and gradually began to produce glass molds for casting progressive plastic lenses
for other manufacturers. In 1994 we established Shamir USA in order to establish a
marketing presence in the United States. In 1995 we made a decision to focus exclusively
on the development and production of progressive lenses. In 1997 we acquired 25% of Eyal,
the manufacturer of Shamir brand plastic progressive lenses. In 1998 we developed the
Eye-Point Technology, proprietary software that simulates human vision, as well as
mathematical tools for the optimal design of progressive and aspherical lenses. Using
these technologies, we developed the Shamir Genesis, Shamir Office and Shamir Piccolo
lenses. In 1998 we, along with Eyal, also established Shamir Insight, our U.S. distributor
of Shamir lens brands, and we purchased an additional 25% of Eyal. In the fourth quarter
of 2001 we acquired Altra and an additional 1% of Eyal to give us control of Eyal. In
November 2003 we acquired an additional 47% of Eyal, and in May 2004 we acquired the
remaining 2% of Eyals shares. In September 2004 we purchased, through Altra,
Cambridge Optical Group, an optical laboratory in the United Kingdom. In addition, on June
27, 2005, one of our partially-owned subsidiaries established a laboratory facility in
Turkey. In establishing this facility, our subsidiary acquired the assets of the
laboratory from another laboratory in Turkey for a purchase price of approximately $2.6
million.

13

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On
September 30, 2005, we completed the purchase of an additional 31.3% stake in Shamir
Insight, Shamirs U.S. distribution center, from Severn Confirmers & Forwarders,
Ltd. In addition, in April 2005 we purchased 2% of Shamir Insight from one of its minority
shareholders. These transactions increased Shamirs holdings in Shamir Insight to
90%.

On
December 1, 2005, Altra formed a subsidiary, Altra France, in order to establish and
operate a laboratory, sales and distribution platform.

In
December 2005, we established a subsidiary in Kibbutz Shamir, Israel, called Shamir
Special Optical Products Ltd., which will manufacture and develop polycarbonate and
finished lenses.

In
January 2006, we purchased 51% of Spherical Optics (PTY) Ltd., a local distributor in
South Africa, through which we distribute our lens brands in the South African market.

On
January 23, 2006, Shamir Special Optical Products Ltd., our wholly owned subsidiary,
signed an agreement with a well known local distributor of lens and frames in the Israeli
market, Einit Ltd. Pursuant to this agreement, Shamir and Einit established a subsidiary,
Shamir Einit Ltd., in which they own equal shares and which will distribute Shamirs
lenses in the Israeli market.

We
are in the process of acquiring up to a 51% interest in a laboratory in Thailand. A
purchase agreement has been signed. The closing is subject to legal and financial due
diligence and to the approval of Shamirs board of directors.

# 4.B BUSINESS OVERVIEW

# Introduction

We
are a leading provider of innovative products and technology to the progressive spectacle
lens market. Utilizing our proprietary technology, we develop, design, manufacture and
market progressive lenses that we sell to the ophthalmic market. In addition, we utilize
our capabilities to provide design services to optical lens manufacturers under service
and royalty agreements. Progressive lenses, also known as progressive addition lenses or
PALs, combine several optical strengths in a single lens to provide a gradual and seamless
transition from near to intermediate to distant vision.

We
differentiate our products from those of our competitors primarily through lens design. We
have successfully pursued a strategy of focusing on higher value product categories, and
several of our lenses are recognized by industry and research sources for their superior
design and quality. Our leading lenses are marketed under a variety of brand names,
including Shamir Genesis, Shamir Piccolo, Shamir Office and Shamir Autograph.

We
believe that we have one of the worlds preeminent research and development teams for
progressive lenses, molds and complementary technologies and tools. Through our research
and development team, we have continually enhanced our capabilities and resources to
develop new, innovative products and design tools with superior characteristics.

We
have developed software dedicated to the design of progressive lenses. This software is
based on our proprietary mathematical algorithms that optimize designs of progressive
lenses for a variety of activities and environments. We have also created software tools
specifically designed for our research and development and production requirements,
including our Eye Point Technology software that simulates human vision. We believe that
these proprietary tools, and in particular our optical design software and our Eye Point
Technology, provide us with a competitive advantage in our market. To maintain this
advantage, we have pursued investments in new technologies in the ophthalmic field and are
developing product technologies in fields such as lens development, lens production and
optical measurement and simulation.

# The Markets in which we
Operate

For
a breakdown of our total revenues by category of activity and geographic market, see
Item 5. Operating and Financial Review and Prospects Operating Results.

According
to Strategy With Vision (SWV)(1), an independent industry research firm, the
global ophthalmic retail market was approximately $56.8 billion in 2005, consisting of
various segments, including frames, spectacle lenses, contact lenses and optical
accessories. The spectacle lens segment makes up the largest portion of this market,
representing approximately 43.6% or $24.8 billion of the global ophthalmic market in 2005.
The global progressive spectacle lens market represents approximately $13.1 billion or
52.8% of the $24.8 billion spectacle lens market and is expected to grow to $17.4 billion
in 2010, representing a compound annual growth rate of 5.9% between 2005 and 2010.

---

|(1) | Unless
otherwise noted, all of the market data in this section was provided by
               SWV or calculated from data provided by SWV. See the discussion of SWVs
               report under Item 3. Key InformationMarket Data.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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Progressive
lenses are used to treat Presbyopia, a vision condition where the crystalline lens of the
eye loses its flexibility and the eye muscles become less powerful causing the eye to lose
its ability to focus on close objects. Presbyopia is part of the normal aging process and
develops gradually over an extended period of time and affects almost everyone over the
age of 45, regardless of whether they have previously had normal vision or have suffered
from myopia, astigmatism or other vision conditions. Presbyopia is a degenerative
condition that worsens and often requires progressively stronger lenses over time.
Presbyopia cannot currently be cured but is treated with lenses that generate optical
power assisting the eye to focus on both close and distant objects. According to the
United Nations, there are expected to be 1.6 billion people over the age of 45 in 2005
worldwide. We believe that almost all of these individuals will suffer from Presbyopia.

Lenses and Alternatives

The
spectacle lens market consists of three primary types of lenses.

| | Single
Vision Lenses.Single vision lenses have only one optical power and are primarily
used to correct deficiencies in either near or distant vision. Global sales of single
vision lenses in 2005 were approximately $8.7 billion and 327.7 million pairs of lenses,
representing an average price of $26.5 per pair. As they are essentially simple
magnifying glasses when used to treat near-sightedness, single vision lenses tend to be
cheaper than other types of lenses and are readily available in most markets in the
world.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Bifocal
Lenses.Bifocal lenses have two optical powers and are used to correct deficiencies
in both near and distant vision. The surface of the bifocal lens is typically divided
into two parts, the upper portion for distant vision and part of the lower portion for
near vision. The division between the two parts of the lens is clearly visible and forces
the eyes to make an abrupt transition. Global sales of bifocal lenses in 2005 were
approximately $2.9 billion and 45.9 million pairs of lenses, representing an average
price of $63.2 per pair.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Progressive
Lenses.Progressive lenses utilize complex designs to combine several optical powers
for different viewing distances, with the optical power gradually increasing from the
upper portion of the lens to the lower portion of the lens. The transition between powers
is gradual and seamless, thereby eliminating distracting lines between the different
vision areas and allowing the user to see at various distances without an image jump,
restrictive focal lengths or demarcation lines, although some users have difficulty
adapting to the distortion areas of progressive lenses. Global sales of progressive
lenses in 2005 were approximately $13.1 billion and 52.1 million pairs of lenses,
representing an average price of $251.4 per pair, and are expected to grow to $17.4
billion and 62.4 million pairs of lenses, for an average price of $278.8 per pair, in
2010. Progressive lenses are generally the most expensive type of lenses and are less
frequently covered by insurance than single vision or bifocal lenses.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

Source: Strategy With
Vision (SWV).

Contact
lenses and surgical procedures, including laser surgery, represent the primary
alternatives to spectacles for the visually impaired. Both contact lenses and surgical
procedures provide solutions for near-sightedness, far-sightedness and astigmatism, but we
believe that they are inferior to progressive lenses as remedies to treat Presbyopia. With
progressive lenses, as the wearer naturally shifts his eyes downward or upward when
focusing on near or far objects, his eyes move gradually through the different optical
powers of the lens. Contact lenses can have multifocal properties, but they are unable to
take into account this natural movement of the eyes. Current applications of laser surgery
to treat Presbyopia seek to modify the optical power of one eye for near distances and
that of the other eye for far distances, thereby reducing overall flexibility and quality
of vision relative to other treatments. In addition, surgical procedures are invasive and
irreversible, can be painful and involve some recuperation time, and do not address the
degenerative nature of Presbyopia.

We
believe that most users choose progressive spectacle lenses due to the benefits of these
lenses over alternative treatments for Presbyopia. While these other techniques may evolve
to be better suited for the treatment of Presbyopia (see Item 3. Key
InformationRisk FactorsWe compete against alternative technologies and
treatments that provide a substitute for spectacle lenses.), we do not believe that
they currently represent a significant alternative to progressive lenses.

15

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Market Growth

The
progressive lens segment is estimated to grow at a compound annual growth rate of 5.8%
from $13.1 billion in 2005 to $17.4 billion in 2010, while the total spectacles lens
market is estimated to grow at a compound annual growth rate of 3.3% from $24.8 in 2005 to
$29.2 billion in 2010. The United States and Europe represent the two largest and
fastest-growing markets for progressive lenses among developed countries. The United
States is the fastest-growing developed geographic market for progressive lenses, with an
expected compound annual growth rate of 6.4%, from $4.4 billion in 2005 to an estimated $6
billion in 2010. The Western European progressive lens market is expected to experience a
compound annual growth rate of 6.0% from $5.6 billion in 2005 to an estimated $7.5 billion
in 2010. In addition, the rate of progressive lens penetration in developing countries
including India, China and countries in Eastern Europe is very low relative to developed
countries and is expected to increase significantly.

We
believe the following factors will stimulate growth in the progressive lens market:

| | Increased
Awareness. Over the past few years, there has been an increasing number of
advertising, marketing, promotional and educational programs supported by progressive
lens manufacturers and optical chains to increase public awareness of progressive lenses
and their advantages. We expect the progressive lens market to continue to benefit from
these programs.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shift
From Bifocal Lenses. Progressive lenses will continue to benefit from the shift in
demand away from bifocal lenses to progressive lenses as a superior treatment for
Presbyopia. In the United States, the progressive lens market is expected to grow by
nearly $1.6 billion between 2005 and 2010, while the bifocal market is expected to
decrease by $200 million during the same period. In Europe, the progressive lens market
is expected to grow by nearly $1.9 billion between 2005 and 2010, while the bifocal
market is expected to decrease by $100 million during the same period. As technologies
evolve and more people begin to require treatment for Presbyopia, we expect that the
market shift from bifocal to progressive lenses will accelerate. The following table
shows the actual and estimated market sizes for the years 2000, 2005 and 2010, as well as
the estimated compound annual growth rate in the United States, Europe and the world from
2000 to 2010.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      | 2000 | 2005 | 2010 | CAGR(1)
|--------------------- | ---- | ---- | ---- | -------
|
|
|
|
|(Dollars in billions) |      |      |      |        
|                      |      |     
|United States         |      |     
|Progressive           |      |      | $    | 3.2    
|Bi-Focal              |      |      | $    | 1.2    
|Europe                |      |     
|Progressive           |      |      | $    | 4.1    
|Bi-Focal              |      |      | $    | 1.1    
|Total World           |      |     
|Progressive           |      |      | $    | 9.8    
|Bi-Focal              |      |      | $    | 3.3    

---

Source: Strategy With
Vision (SWV).

|(1) | CAGR
calculated on the basis of the growth between 2005 and 2010.
|--- | -----------------------------------------------------------------

| | Favorable
Demographic Trends. Multifocal lenses, which include bifocal and progressive lenses,
are currently the only satisfactory treatments for Presbyopia. Because Presbyopia
generally becomes symptomatic for individuals in their early forties, the primary market
for progressive lenses is people over the age of 45. According to the most recent U.S.
Census, the U.S. population over the age of 45 is expected to grow to 120 million by 2010
from 103 million in 2003, representing a compound annual growth rate of 2.2%, more
than double the average growth rate of the total population. In addition, average life
expectancies are also expected to increase during these periods. According to the United
Nations, the European population over the age of 45 is expected to grow to 315 million in
2010 from 299 million in 2005, representing a compound annual growth rate of 1.1%,
compared to the expected slight decline in the total population during that same period.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Advancements
in Lens Technologies. Over the past decade, there have been significant technological
advances in lens quality due to the development of design and manufacturing processes,
anti-reflective coatings, improved raw materials and other factors. We believe that the
continuous introduction of improved technology will also encourage customers to upgrade
and replace their lenses.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fashion
Trends. Leading companies in fashion, cosmetics and athletics are promoting multiple
spectacle frames of different styles for different activities. We believe this trend will
result in increased purchases of spectacles, as fashion-conscious customers will choose a
different frame for each specific activity. In addition, we believe that these customers
will prefer progressive to bifocal lenses for the lack of visible lines marking the shift
in prescription strengths.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

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| | Maturing
of New Markets. We believe that currently approximately half of all people suffering
from Presbyopia are left untreated. A significant part of these potential customers
reside in China and India. We believe that, as these countries develop and health care
becomes more readily accessible, the demand for progressive lenses as a solution to
Presbyopia will expand as well.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
believe that we are strongly positioned to benefit from these trends, especially due to
our proprietary technology created by our research and development team, which we believe
will enable us to continue to design and manufacture top quality lenses, and due to our
marketing capabilities.

Market Structure

The
following graphic shows the flow of orders and goods in the market for optical lenses.



The
current progressive lens market is driven by the eye correction needs of the patient. A
patient undergoes an eye examination in which an optical doctor or an optometrist
determines the proper prescription and sends it to an optical laboratory. To complete the
prescription, the optical laboratory uses semi-finished progressive lens blanks that are
supplied by lens manufacturers. Semi-finished progressive lens blanks are lenses that
contain the progressive surface on one side and are unfinished on the other. The optical
laboratories finish the progressive lenses by surfacing the other side of the lens blanks
according to the prescription and may add coating or tinting that the customer may
request. The finished lenses are finally cut, edged and mounted onto the frame by the
optical laboratory or the optical shop and delivered to the patient.

# Basis for Statements
about our Competitive Position

We
compete primarily with manufacturers of progressive spectacle lenses and molds. Our main
competitors include Essilor, Hoya, Rodenstock and Zeiss (recently merged with Sola) for
the production of semi-finished lenses and molds, and Crossbows Optical for the
development and design of molds. Many of our competitors have significantly greater
resources than we do and may benefit from greater economies of scale. See Item 3.
Key InformationRisk FactorsThe industry in which we operate is highly
competitive, and these competitive pressures may harm demand for our products. In
Europe our competitors primary distribution channels are the optical laboratories
that they own. We compete with these laboratories, as well as with other distributors in
Europe that do not own their own labs, through our optical laboratories and distribution
centers in France, Spain, Turkey, Portugal and the United Kingdom.

Competition
in our industry is based primarily on technological innovation and product quality, as
well as on breadth of product offerings, customer service and price. Price competition can
be severe in the spectacle lens industry, especially in certain geographic markets and for
high-volume, standardized products. We attempt to counter this competition to the extent
possible by offering what we believe are among the highest quality progressive lenses in
the market. We believe that our sales of progressive lenses constituted less than 5% of
the global progressive lens market in 2005. We also believe that our providing research
and development services gives us a competitive advantage over other progressive lens
manufacturers who sell only finished products to the market.

For additional information about our
competitive position, see Products, below.

We
believe that we have a number of competitive strengths that allow us to capitalize on the
prevailing trends in our industry. These strengths include:

Research and Development
Expertise

We
believe that we are a technological leader in the progressive spectacle lens market.
Through our research and development efforts, we believe that we possess expertise in
developing a variety of new progressive lens designs and production techniques. Our
proprietary Eye Point Technology is based on mathematical algorithms that simulate the
vision of the human eye in order to calculate the optical performance of the lens. This
technology has become the cornerstone of our research and development approach and enables
us to minimize distortions inherent in the design of progressive lenses. In addition, we
have developed, both independently and with our research affiliates, a number of other
technologies in the fields of optical design software, optical and geometric measuring of
optical surfaces and computerized processing of optical surfaces and elements, which we
believe will help us to maintain our position at the forefront of progressive lens
research and development. We believe that the quality of our research and development
efforts has been validated by independent industry publications, as well as by our ability
to sell exclusively designed progressive lenses and molds to other leading progressive
lens manufacturers for the production or sale of their own branded lenses.

17

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Leading Products for the
Progressive Lens Market

When
we began operations in the progressive lens field, we were among the first companies in
the world engaged in the design, development and marketing of progressive lenses, and we
have focused on progressive lenses since 1995. According to SWV, the progressive lens
market represented approximately 52.8% of the $24.8 billion global spectacle lens market
in 2005and is the fastest growing segment of the optical lens market with the
highest average sales price and the most attractive margins. Our concentration on
progressive lenses has enabled us to develop lens designs and technologies to produce
lenses that are considered among the best-performing lenses in the industry. Our leading
product portfolio includes Shamir Genesis, our general purpose lens, Shamir Piccolo for
use in small frames, Shamir Office for viewing distances common to an office environment,
and Shamir Autograph, which is based on our Direct Lens Technology to allow greater
customization of the lens.

Strong Distribution
Channels

We
have created two separate distribution strategies for our two principal markets, the
United States and Europe, which are specifically tailored to our target customers in each
market. Our sales in Europe accounted for $46.4 million, or 57.7%, of our revenues in
2005, and sales in the United States accounted for $26.0 million, or 32.4%, during the
same period. In Europe, where there has been significant consolidation and, as a result,
fewer optical laboratories unaffiliated with lens manufacturers or retail chains remain
(see Marketing and Distribution), we sell directly to retail optical
shops through our vertically integrated optical laboratories in Portugal, Turkey and the
United Kingdom, as well as through our distribution centers in Spain, France and Germany.

In
the United States, vertical integration of manufacturers and optical laboratories is less
prevalent, which has resulted in a strong customer base made up of more than 180 of the
independent U.S. laboratories. As of today, we have not acquired independent optical
laboratories in the United States. As a result, we are one of the few leading
manufacturers not in direct competition with independent laboratories in the United
States. We have expanded our U.S. sales from approximately $15.7 million in 2002 to
approximately $26.0 million in 2005, representing a compound annual growth rate of 18.3%.

Ability to Leverage
Resources

We
apply our research and development expertise and resources to making our own lenses and to
providing design services to third party lens manufacturers. By providing these services
to manufacturers, we are able to generate revenues and further expand our intellectual
property base. While our design services customers have the right to use the designs we
create, in some instances on an exclusive basis, we maintain ownership rights to the
intellectual property developed by our research and development teams while developing the
designs. Through our design services to third party lens manufacturers, we have
successfully introduced our technology to the market without having to bear the cost of
marketing and manufacturing. As a result, we are able to generate design service revenues,
including royalties, by leveraging our proprietary intellectual property across a broad
spectrum of customers in our established markets.

In
addition, we believe that the implementation of our free form production technology and
the ability of optical laboratories to produce custom-made progressive lenses to
specification, using our innovative software and based on our mathematical algorithms,
have the potential to increase our revenues significantly and to enhance our financial
results. As laboratories adopt the Free Form Technology and license our software to
produce lenses, we are able to generate revenues without incurring the cost of
manufacturing. Moreover, as we expand into developing markets, we will further leverage
our proven technology across a broader geographic base.

Strong Ownership,
Dedicated Workforce and Experienced Management Team

Kibbutz
Shamir is our largest shareholder and holds 58.72% of our outstanding shares as of June
15, 2006. Kibbutz Shamir was founded in 1944 and is a small communal society of
approximately 270 members, including 37 of our employees in Israel. As with most
kibbutzim, each member of Kibbutz Shamir owns an equal part of the assets of Kibbutz
Shamir. Kibbutz Shamir has been successful in developing and encouraging a creative and
dedicated managerial and entrepreneurial team to manage the businesses owned by Kibbutz
Shamir, including two companies listed on the Tel Aviv stock exchange, Shalag Industries,
Ltd. and N.R. Spuntech Industries, Ltd.

The
seven members of our executive management team, including at certain of our subsidiaries,
have a cumulative 125 years of experience in the ophthalmic industry. Led by Giora
Ben-Zeev, our President and Chief Executive Officer, our management team supports a
particularly creative and dynamic culture, which we believe enhances our ability to
innovate. Our executive management group has completed a number of key strategic
initiatives, improved our financial performance, successfully completed and integrated
acquisitions, strengthened sales and marketing, and enhanced our focus on research and new
product development. Three of our directors, including our chief executive officer, and an
additional two executive officers are members of the management board of Kibbutz Shamir.

18

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# Growth Strategy

The
following plans are the focal points of our strategy to grow our business and increase our
revenues.

Maintain Technological
Leadership

We
plan to further strengthen our research and development efforts to continue to develop
innovative optical design tools, which will be used to design new optical products. We
plan to maintain our position among the leading designers and developers of new innovative
products that we will utilize for our own production and distribution and sell to third
parties. We also plan to continue to invest in promising technologies both directly and
through our subsidiaries and affiliated entities. We believe that the technologies we are
developing will enable us to maintain our technical leadership and create innovative
premium products, services and technologies into the future.

Capitalize on Positive
Demographic Trends and Increase Penetration

Given
our strategic focus on progressive lenses, we believe that we are well positioned to
benefit from the positive demographic trends in developed countries and the increased
penetration of progressive lenses in developed and developing regions. Because Presbyopia
is an age-related process that affects almost all individuals above the age of 45, demand
for progressive lenses will continue to benefit from the aging of the population. In
addition, the multifocal lens market continues to experience a positive transition to
progressive lenses as a superior alternative to bifocal lenses. We intend to capitalize on
our strong design and manufacturing capabilities in order to take advantage of these
demographic and market trends.

Increase Share in Key
Markets

We
plan to expand our sales in Western Europe by acquiring or establishing additional optical
laboratories and marketing platforms, and also plan to implement new sales and marketing
programs to further leverage our existing optical laboratories and distribution centers in
Germany, Spain, Portugal, France, South Africa, Turkey and the United Kingdom. We plan to
significantly increase our presence in the United States by expanding our sales force and
increasing our marketing programs. We plan to increase awareness and brand recognition
world-wide by participating in trade shows, seminars and conventions, and hosting
presentations for optometrists, opticians and ophthalmologists. We believe that greater
brand recognition, combined with the quality of our products, will enable us to expand our
business with existing laboratory customers and generate additional business from
potential new customers.

Expand into New
Geographic Markets

Given
the population demographics of China, India and Eastern Europe, and the low current
penetration in these areas, we believe these markets provide significant growth
opportunities for our products. In each of these markets, we have established
relationships with optical laboratories and distributors with whom we intend to develop
exclusive agreements so that they distribute only our products, as we have done in other
parts of the world. In addition, we plan to explore vertical acquisitions of optical
laboratories or to establish new laboratories or distribution platforms with local
strategic partners where appropriate to maintain and increase our market share. By
developing new and existing distribution relationships and expanding our sales of
technology solutions and design molds into developing markets, we believe that we will be
able to further leverage our proven technology across a broader geographic base, deriving
even more value from our existing resources.

Implement New Approach of
Designing and Manufacturing Personal Lenses

We
were among the first progressive lens manufacturers to provide optical laboratories with a
newly developed free form production method. Our free form production method, known as our
Direct Lens Technology, is an advanced surfacing technology for creating premium lenses
customized for the unique needs of each patient. By combining the patients exact
vision requirements with our proprietary Eye Point Technology, a personal file for a
customized progressive lens is created and transferred to advanced cutting and polishing
machinery for production. Although we do not expect revenues from the free form technology
to be material in the near future, we believe that over time free form production methods
will redefine the traditional ophthalmic business model on an industry-wide basis. We are
currently utilizing our Direct Lens Technology in the optical laboratory of selected
customers, and we intend to increase the number of laboratories to whom we license this
technology. We believe that this licensing arrangement will provide software royalties
with limited incremental cost.

19

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Focus on Value-Added
Materials

Our
lenses are available in a variety of materials, including standard plastics and high
refraction index plastics that allow for thinner lenses. We plan to continue to increase
our offerings of lenses made from plastic and high index material. While lenses produced
from these materials currently represent only a small portion of the total market, we
believe that they represent the fastest growing segment for progressive lenses and provide
enhanced profit margins. Our increased efforts to capitalize on this growth opportunity
include plans to build a new manufacturing facility focused on high index lenses. We
believe these strategies will improve the performance of our products and generate
increased sales.

# Operations and Principal
Activities

# Products

Our
products consist of lenses that we sell to optical laboratories and design services,
including molds, which we sell to optical lens manufacturers under service and royalty
agreements. During 2005 revenues from our sales of lenses accounted for 90.2% of our total
revenues, while revenues from our sales of design services accounted for 9.8% of our total
revenues.

Lenses

Premium
Lenses. According to market data current as of June 15, 2006, we have been a market
leader in manufacturing premium progressive lenses in a wide range of materials over the
past several years. These lenses are sold under our own brand names as well as private
labels. We currently produce over 50 principal types of progressive lenses, which differ
from one another in design, color and lens material, as well as in size and shape. The
following table shows our primary brands of lenses.

|Brand            | Characteristics                                                                                             | Available Materials            | Other                                                          
|---------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------ | ---------------------------------------------------------------
|Shamir Genesis   | All-purpose progressive lens                                                                                | Plastic, Mineral, Trivex       | Ranked #1 by"Optometry" journal forfit heights 18 and22.(1)    
|                 |                                                                                                             |                                |                                                                
|Shamir Office    | Designed for visual clarity from 1.3 ft. to 10 ft. Allows comfort for people working in closedenvironments. | Plastic, Mineral               |                                                                
|                 |                                                                                                             |                                |                                                                
|Shamir Piccolo   | Designed to fit into any small frame.                                                                       | Plastic, Mineral,Polycarbonate | Ranked #1 by"Optometry" journal forfit heights 16, 18 and22.(1)
|                 |                                                                                                             |                                |                                                                
|Shamir Attitude  | Designed to fit "wrap - Around" frames                                                                      | Plastic, Polycarbonate         |                                                                
|                 |                                                                                                             |                                |                                                                
|Shamir Creation  | Flat lens fit for fashionable frames                                                                        | Plastic, Mineral,Polycarbonate |                                                                
|                 |                                                                                                             |                                |                                                                
|Shamir AutoGraph | Customized back surface progressive lens.Produced using free form technology.                               | Plastic Polycarbonate          |                                                                

---

(1)    
          Rankings are according to a study entitled Progressive Addition
          LensesMatching the Specific Lens to Patient Needs, by James E.
          Sheedy, O.D., Ph.D. in Optometry, the Journal of the American Optometric
          Association, Vol. 75, Nr. 2, February 2004. The report examined lenses with fit
          heights of 16, 18, 22 and 26 millimeters, those heights that it considered most
          common. Fit height refers to the distance on the lens between the
          point on the lens directly across from the middle of the pupil and the bottom of
          the lens. Smaller frames require lower fit heights that must address the
          transition between viewing distances in a more compact area.

Free
Form Lenses. In addition to our premium lens offerings described above, we also
produce lenses under the Shamir Autograph brand using our new proprietary free form
production method known as our Direct Lens Technology. We released this technology in the
first quarter of 2004. Our Direct Lens Technology creates a unique personal computer file
for a customized progressive lens by combining the patients exact vision
requirements with our proprietary Eye Point Technology. This file can be transferred to
advanced cutting and polishing machinery for mold-free lens production. This single
process yields a finished lens that contains both the progressive and prescription
characteristics and does not require any further surfacing. In addition, this process
allows the optical laboratory to place both the progressive and prescription
characteristics on the back surface of the lens, which is closer to the patients
eye, thereby enhancing the field of view. By taking into account the patients
personal prescription, measured or traced frame data and the exact pupil position for
specifically chosen frames, the Shamir Autograph is a finished, customized progressive
lens that is ready for edging and framing in every type of frame. In addition to producing
these lenses ourselves, we are also currently licensing this technology to selected
laboratory customers to allow them to produce these advanced lenses tailored to meet their
patients unique requirements. To date, revenues from licenses for this technology
have not been material.

20

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Design Services

Research
and Development Services. We provide third party lens manufacturers with research and
development services in which we develop new optical designs and related software tools
designed for the production processes of lenses and for which we receive ongoing payments
and future revenues from royalties. As such we operate as an outsourced research and
development arm for third parties. We believe that some of these manufacturers, such as
The Spectacle Lens Group, formally a division of Johnson & Johnson Vision Care, which
was recently purchased by Essilor, may have the potential to provide us with substantial
future revenues from royalties by devoting substantial marketing resources and leveraging
their brand recognition and experience in rolling out new products to become significant
players in the progressive lens market. See also Research and
Development.

Molds.           We
specialize in the design and manufacture of sophisticated progressive lens
          molds for use by plastic lens manufacturers. We believe our customers value our
          ability to design tailor-made optical molds to satisfy precise requirements
          regarding size, base curves, markings and other properties. We design and
          produce several different molds that can be easily adapted to customer needs by
          changing characteristics including invisible markings, edge configuration and
          thickness.

# Research and Development

Our
research and development group, which includes approximately 34 engineers, mathematicians,
physicists, chemists, programmers and optical technicians, is considered one of the
worlds pre-eminent research and development teams for development of progressive
lenses, molds, and complementary technologies and tools. We constantly enhance our
capabilities and invest resources in order to develop new innovative products and related
tools designed to optimize the production processes. Innovation, technological
sophistication and rigorous quality assurance practices have enabled us to position
ourselves as a clear technology leader in the progressive lens segment of the lens market
and contributed to our growth.

In
addition to pure optical tools, we have developed complementary software tools
specifically designed for our research and development requirements, including proprietary
software that simulates human vision, and mathematical tools that optimize the design of
progressive and aspheric lenses. These proprietary tools, and in particular our Eye Point
Technology, enable us to maintain a strong competitive advantage.

Research and Development
Teams

Our
technologies are developed through a cooperative process among our integrated research and
development teams that follow the generation of a new concept through to the completion of
a new lens or mold design that is ready for production.

Algorithm
and Software. Our algorithm and software team works to generate mathematical
algorithms aimed to optimize lens design and integrate these algorithms into the optical
design software that we build for creating our optical products.

Optical
Design. Our optical design team uses our proprietary software to create innovative
progressive lens and molds designs for us and our design services customers.

R&D
Optical Laboratory. Our R&D optical laboratory team generates prototypes for
experimentation and testing of each lens and mold designed by our optical design team,
using similar manufacturing systems to those that are in place in our mass production
facilities.

Optical
Measurement. Our optical measurement team utilizes our advanced measurement
capabilities to analyze the prototype and provide our optical designers with detailed
information from the prototype that our optical laboratory team has produced.

Proprietary Technologies

Optical
Design Technology. We have developed a unique family of optical design software tools
that enable us to create our lenses using unique mathematical algorithms to optimize the
optical characteristics of the lens and minimize distortion. These algorithms are
continually reviewed and improved to take into account new production methods and advances
in raw materials to enable us to quickly integrate new technologies into our design and
manufacturing operations.

Eye
Point Technology. Our Eye Point Technology utilizes a dedicated ray-tracing program
that we developed to compute optical properties and simulate human vision. Capable of
calculating the optical performance of thousands of locations covering the surface of a
lens, the ray-tracing program takes into account numerous vision parameters essential for
developing progressive lenses. We believe this technology represents a significant
departure from conventional lens analysis tools and enables us to optimally develop every
lens point in order to create progressive lenses meeting precise individual requirements.

21

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Direct
Lens Technology. Direct Lens Technology is our free form production technology that
uses dedicated optical machines that are capable of forming a uniquely designed optical
lens by processing the raw material to meet the desired geometrical and surface
characteristics. Our Direct Lens Technology creates a unique personal electronic file for
a customized progressive lens by using our proprietary Prescriptor software to combine the
patients exact vision requirements with our proprietary Eye Point Technology. This
electronic file can be transferred to advanced cutting and polishing machinery for
mold-free lens production. This single process yields a finished lens that contains both
the progressive and prescription characteristics and does not require any further
surfacing. In addition, this process allows the optical laboratory to place both the
progressive and prescription characteristics on the back surface of the lens, which is
closer to the patients eye, thereby enhancing the field of view.

Additional
Technologies. In addition to our own internal research and development efforts, we
seek to make investments and form joint ventures to explore additional opportunities for
advancements in the optical field. See Corporate StructureSignificant
Subsidiaries and Equity Investments. These interests include the following
relationships:

| | Our
subsidiary Inray Ltd. engages in the research and development of algorithms and software
that facilitate the development of tools for designing lenses and optimizing their
optical characteristics. We own 50% of the shares and 50% of the voting rights in Inray.
Dymotech Ltd., a company controlled by the Technion Israel Institute of Technology, and
two of the Technions researchers own one-sixth of the voting rights each. We
believe that the technologies developed by Inray are not only relevant to the field of
optics and vision lenses, but also germane to developing software to improve vision in
the field of contact lenses and measurement of the cornea of the eye prior to surgical
operations to repair vision.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shamir
Or Ltd. focused on developing innovative lenses based on diffractive optics, the
manipulation of lens characteristics by means of fine notching on the lens that affects
the direction of rays of light. This technology would enable us to improve the optical
characteristics of the lens. We currently hold 50% of Shamir Ors issued shares and
voting rights.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e-Vision
LLC is exploring the use of electroactive technologies to create lenses that can change
refractive powers to allow users to focus their vision at varying distances.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Seasonality

The
Company experiences seasonal variations in its quarterly results, with third quarter
results generally weaker than the other three quarters. Third quarter results are lower as
a result of lower sales during the summer vacation season in Europe.

# Marketing and
Distribution

Our
marketing efforts focus on lenses and design services. Our progressive lenses are marketed
to optical laboratories, retail chains, buying groups and opticians. Our research and
development services, which include molds designed for the production of progressive
lenses, are marketed primarily to other manufactures of plastic lenses. We believe we have
gained a reputation in the design services market as a quality leader.

Lenses

Our
marketing strategy in the United States differs from the marketing strategy in Europe and
the rest of the world. In the United States it is a customary practice for optical shops
to determine for its patient the type of lens to be generated whereas in Europe and the
rest of the world the optical laboratories generally make such determinations. Therefore,
marketing in the United States requires a larger marketing force and greater presence in
order to reach as many optical shops as possible.

United
States. The U.S. ophthalmic market is characterized by a large number of laboratories,
many of which are independent, as well as large national retail chains and buying groups,
some of which own their own laboratories. We currently market and distribute our products
in the United States directly to independent laboratories, using our marketing subsidiary
Shamir Insight, which has pursued a proactive marketing campaign through its sales force.
Our marketing platform aims to build brand recognition for our lenses through its focus on
progressive lenses and sponsorship of industry seminars attended by optometrists,
opticians and ophthalmologists. We do not own optical laboratories in the United States in
order not to compete with these laboratories. We focus our U.S. marketing efforts on these
laboratories, and our independent status has enabled us to achieve significant growth in
this market. To support our marketing efforts and further educate the market on
progressive lenses, we developed our ReCreating Perfect Vision promotional
campaign, in which more than 180 independent laboratories have joined into a special
marketing effort urging costumers to use Shamir lenses while presenting the
Eye-View software, a proprietary program that illustrates differences in lens
quality and design. To expand and maintain the quality of our sales force, Shamir Insight
only hires account executives with at least five years experience as qualified opticians
and has created an advanced sales training program through which it educates all new
executives.

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Europe.           The
European ophthalmic market has experienced significant consolidation of           optical
laboratories, and fewer of these laboratories remain unaffiliated with           lens
manufacturers or retail chains. In Europe, we market and sell our products
          through our subsidiary Altra. Altra relies on two primary distribution
channels.           The first channel is comprised of Altras distribution centers
and optical           laboratories in Germany, Spain, Portugal, France, Turkey and the
United Kingdom.           From these locations, we distribute progressive lenses and also
offer a variety           of non-progressive lenses that we source from other
manufacturers in order to           provide the market with a comprehensive offering of
optical lenses. In each of           our locations, we employ a professional, well
trained sales force that builds           our brand name through direct sales efforts and
attendance at conventions,           presentations and trade shows. Our state of the art
distribution center in           Germany maintains an inventory of several thousand
varieties of semi-finished           progressive, bifocal and single vision lenses and
finished single vision lenses,           has significant capacity, and enables us to
provide just-in-time deliveries of           nearly any size order to anywhere in Europe.
The second channel we pursue           consists of optical laboratories, chains and
buying groups that market our           products primarily under a private label. Due to
our delivery capabilities,           variety of finished and semi-finished lenses, and
customer service provided by           our laboratories and distribution centers, we
believe we can increase our           business with our existing customers while
simultaneously obtaining business           from new opticians, optical laboratories,
retail chains and buying groups.

The
Rest of the World. We market and sell our products in the rest of the world through
distributor relationships or directly to optical laboratories. We have established
relationships with distributors in several markets, which we intend to develop so that
they distribute only our products as we have done in other parts of the world. We also
plan to explore opportunities for vertical acquisitions of optical laboratories or for
establishing new laboratories or distribution platforms together with local strategic
partners where appropriate to maintain and increase our market share. An example of this
strategy was our purchase, in January 2006, of 51% of Spherical Optics (PTY) Ltd., a local
distributor in South Africa, through which we distribute our lens brands in the South
African market. In addition, we participate in many international optical trade shows,
such as OLA and Vision Expo in the United States, Silmo in Paris, Mido in Milan, and also
local trade shows in China, India, South Africa, Brazil, Spain, Portugal and the United
Kingdom.

Design Services

We
have established close technological relationships with other lens manufacturers worldwide
for whom we design and to whom we sell molds and design services. We maintain these
relationships through ongoing contacts between the research and development teams and
between the engineering departments of the lens manufacturers.

In
1994 we established Shamir USA as our marketing channel and distributor of research and
development services in the United States. Since then, we have developed supplier-customer
relationships with many lens manufacturers in the United States.

# Customers

Our
customers are optical laboratories and opticians for spectacle lenses and third-party lens
manufacturers for design services. During 2005 our three largest customers accounted for
19.7% of our revenues. Our largest customer accounted for approximately 7.2% of our
revenues during 2005. The remaining 80.3% of our revenues are spread across a large number
of customers in various geographic locations, and no other customer, other than our three
largest customers, accounted for more than 5% of our revenues.

# Manufacturing Operations

We
operate manufacturing and research and development facilities in Kibbutz Shamir in
northern Israel and a manufacturing facility in Kibbutz Eyal in central Israel. These
facilities produce glass molds and semi-finished glass and plastic lenses. We also produce
finished glass and plastic lenses at our optical laboratories in Portugal, Turkey and in
the United Kingdom.

Raw Materials

The primary raw materials that we use
in our production operations are glass blanks and monomers. The supply market for these
raw materials is dominated by a small number of suppliers. See Item 3. Key
InformationRisk FactorsWe are dependent on a small number of suppliers for raw
materials.

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Production of
Semi-Finished Plastic Lenses

Initial
Processing of the Raw Material.We initially combine a mixture of raw materials to
prepare the plastic for casting.

Mold
Assembly. Two glass molds, one for forming the convex progressive surface of the lens
and one for forming the concave surface of the lens are assembled in a plastic ring or
tape. The volume between the two molds is sealed by this plastic ring or tape.

Casting.           The
volume between the two molds is filled with the plastic raw material and the
          two molds are inserted into an oven for polymerization, or hardening, after
          which time the molds are removed and separated leaving the plastic lens formed
          by the molds. Following each use, the glass molds are inspected and rinsed with
          specially designed detergents and chemicals to treat them for re-use.

Curing
and Coating. After the lens is formed by the molds, it undergoes a curing process in
order to alleviate internal stress and is coated in accordance with the customers
request.

Marking
and Quality Assurance. Once the plastic lens is formed and coated, it is subjected to
marking and quality assurance procedures similar to those utilized for glass lenses.

Production of Finished
Plastic Lenses by Free Form Technology

Free
form technology refers to a new lens production technology that incorporates special
optical machines that are capable of accurately forming an optical surface defined by a
computer data file. Using this technology, we surface plastic lenses so that the lenses
are made according to the prescription requested by the optometrist. We also license this
production method to select optical laboratory customers to allow the production of
individualized plastic lenses with greater optical accuracy. Using this technology, a
spherical semi-finished plastic lens blank is processed on its concave side by a
computer-controlled free form optical lathe. The lathe computer is loaded with a surface
data file. The surface data file is specifically computed by our proprietary Prescriptor
software to meet a desired prescription. After forming the surface topography by the
lathe, the lens is polished by a free form polishing machine to achieve optical surface
quality. Using a laser engraving system, we etch reference marks on the concave surface to
enable the optician to properly fit the lens into the frame.

Production of Glass Molds
and Semi-Finished Glass Lenses

Initial
Processing of the Raw Material. We receive raw material in the form of glass round
blanks, which are then ground, lapped and polished in order to give them an accurate form
and high optical quality surface.

Rinsing.        The
blanks are rinsed thorough a series of ultrasonic tanks to remove production
          residues from the surface and then dried.

Imprinting
the Progressive Attributes. Each blank is laid on a ceramic block for imprinting the
progressive attributes and passed through a special heating oven in order to relax its
form. We produce the ceramic blocks using computerized milling equipment, which imprints
topography of the progressive surface on the ceramic block using our proprietary software.
When the glass softens, the ceramic block structure is copied onto the blank and the
progressive attributes are retained on the surface.

Marking.           Each
lens is etched with semi visible and visible marks to aid with the precise
          adjusting and mounting of the lens in the eyeglass frame and other marks
          requested by customers, such as a customers logo.

Quality
Assurance and Control. Lenses and molds undergo rigorous quality control for
cosmetics, such as cracks or nicks, and optics, such as power and geometry. Our production
factory is ISO 9002 certified.

The
process for producing glass progressive lenses and molds is similar, but the production of
molds involves additional edge processing to shape the molds edge so that it will
fit the manufacturing systems of the customer to whom we sell the mold.

24

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Free Form Production of
Glass Molds

In
addition to the traditional production methods described above, we have begun to use our
free form production method for our internal glass molds production process. In this free
form production method, advanced grinding and polishing machines are used to surface the
mold in accordance with the topography of a surface that was computed by our optical
design software. This production technology enables us to create a desired multifocal
surface topography of the mold by machining the glass surface instead of forming it by
heat. We grind a glass blank with a computer-controlled free form grinding machine. This
process creates the needed surface topography. We then polish the lens with dedicated
computer-controlled free form polishing machines. The rest of the production process is
similar to that of plastic lenses. This production technology involves fewer steps and
results in higher surface accuracy than traditional production.

# Extent of Dependency on
Patents/Licenses

We
seek to protect our intellectual property through patents, trademarks, trade secrets and
other appropriate protective measures in the primary markets in which we are active. As of
December 31, 2005, we hold 3 U.S. patents and 1 U.S. application directly, 4 through our
subsidiary Inray Ltd., and several patent applications covering our innovative algorithms
and methods of designing multifocal surfaces. We own rights directly or through our
subsidiary Shamir Insight Inc., in the following trademarks in various jurisdictions
world-wide: Shamir, Shamir logo, Shamir Genesis, Genesis, Shamir
Piccolo, Piccolo, Shamir Office, Shamir Creation, Shamir
Autograph, Autograph, Shamir Attitude, Attitude, Prescriptor
and Eye Point Technology Freeform, Freeform Lenses, Freeform
Technology, Freeform Software Protocol Panorama, Eye Point, Direct
Lens Technology, Autograph Golf, Autograph Short, Autograph
Everyday, Piccolo Wrap, The Progressive Lens Experts, Titan
Hardcoat, Deskvision, Individual Eyes, Recreating Perfect Vision,
Multispace, Nano, Piccolo Nano, Autograph Nano, Studio Our
main trademarks are registered or are in the process of being registered in the United
States, the European Union, Canada and additional countries. We do not believe that our
viability or profitability substantially depends on any single patent, trademark, trade
secret or other piece of intellectual property.

When
we create lens designs for our design services customers, these customers generally have
the right to use these designs, in some instances on an exclusive basis, while we maintain
ownership rights to the intellectual property developed by our research and development
teams during the creation of these designs.

# Material Effects of
Government Regulations

We
are subject to regulatory requirements governing the manufacture and sale of spectacle
lenses in all of the markets in which we operate. In particular, in the United States our
lenseslike those of our competitorsmust comply with the so-called
drop-ball impact test to satisfy the safety requirements for the sale of
lenses of the U.S. Food and Drug Administration. The drop-ball impact test involves
dropping a steel ball of specified size from a specified height onto the center of a lens
with a specific size. The lens passes the test if it does not break.

In
Europe our lenses must obtain certifications within the requirements of the Medical Device
Directive 93/42 EEC. These certifications relate primarily to the adequacy of the
procedures used in the manufacture, testing and sale of spectacle lenses.

In
addition, our operations are subject to stringent environmental regulations throughout the
world concerning, in particular, air emissions, waste water discharge and the generation,
handling, storage, transport and disposal of hazardous wastes. These laws and regulations
have for the most part become increasingly stringent over the years. In order to comply
with these laws and regulations, we use non-hazardous materials and chemicals in our
manufacturing processes where feasible. Certain of our processes, including cleaning
lenses, assembling molds and coating lenses, require a variety of volatile and hazardous
substances. Where use of these substances or other hazardous materials is essential, we
develop manufacturing processes in compliance with relevant local, national and
international environmental and safety standards.

Our
policy is to meet or exceed all applicable environmental and health and safety laws and
regulations. We believe that we possess all material permits and licenses necessary for
the continuing operation of our business and that our operations are in substantial
compliance with the terms of all applicable environmental laws and regulations. We cannot
predict the impact of any new environmental laws or regulations or of changes in current
environmental laws or regulations on our operations.

25

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# 4.C ORGANIZATIONAL
STRUCTURE

In
furtherance of our focus on innovative research and development projects, we have acquired
equity interests in companies in the optical field. The following chart shows the names
and locations of our direct and indirect significant subsidiaries and equity investments,
along with our ownership interest in each relevant subsidiary.

---

|(1) | As
of September 30, 2005, Shamir holds a 90% ownership interest in Shamir
               Insight, Inc. In addition, Shamir is entitled to vote the shares held by
Shamir                USAs president, Michael Latzer, in Shamir Insight, Inc.,
which amount to                an additional 10% of the voting power in Shamir Insight,
Inc. As a result,                effectively, we hold 100% of the voting power in Shamir
Insight, Inc.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Shamir
has a 50.03% ownership interest and holds 50% of the voting rights in           Inray
Ltd.
|--- | -------------------------------------------------------------------------------------------------

|(3) | Shamir
has a 19.8% ownership interest and holds 19.5% of the voting rights in           e-Vision
LLC
|--- | ----------------------------------------------------------------------------------------------------

The
subsidiaries and equity investments shown in the chart above engage in the following
business activities:

| | Eyal
Optical Industries (1995) Ltd. manufactures Shamir plastic progressive and other lenses.
We hold 100%      of the shares of Eyal Optical Industries through Eyal Optical Holdings
A.C.S. Ltd. (48.15%) and directly      (51.85%).
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shamir
USA, Inc., which we established in 1994, is one of our marketing and distribution
companies in the      United States.
|- | -----------------------------------------------------------------------------------------------------------------------------

| | Shamir
Insight, Inc., which we established with our former partner, Severn, in 1999, is our main
marketing      and distribution company in the United States.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Altra
Trading GmbH, in which we acquired our stake in 2001, is our main marketing and
distribution company in Europe.
|- | ---------------------------------------------------------------------------------------------------------------------

| | Inray
Ltd., jointly owned by us, the Technion Israel Institute of Technology and two of its
researchers, engages in the research and development of algorithms and software for the
optics industry to facilitate the development of tools for designing lenses and
optimizing their optical capacity.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e-Vision
LLC is exploring the use of electroactive technologies to create lenses that can change
refractive powers to allow users to focus their vision at varying distances.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interoptic
SARL is our distributor in Paris, France.
|- | ----------------------------------------------------

| | Altra
Optica Espana SL is our distributor in Spain.
|- | ---------------------------------------------------

| | Altra
Turkey is our laboratory facility and distributor in Turkey.
|- | ------------------------------------------------------------------

| | Altra
France is our laboratory facility and one of our distributors in France.
|- | ------------------------------------------------------------------------------

| | Spherical
Optics (PTY) Ltd. is our local distributor in South Africa. We acquired 51% of the
ownership      interest and voting rights in Spherical Optics (PTY) Ltd. in January 2006.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Altra
Optica Lda. is our optical laboratory in Portugal, which serves Portugal, Spain and other
western      European countries.
|- | --------------------------------------------------------------------------------------------------------------------------------

| | Altra
Optics UK Limited is our optical laboratory in the United Kingdom, which we acquired in
September 2004, and which we hold through Cambridge Optical Group Limited.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2005, we established a subsidiary in Kibbutz Shamir, Israel, called Shamir
Special Optical Products Ltd., which will manufacture and develop polycarbonate and
finished lenses.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26

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| | On
January 23, 2006 Shamir Special Optical Products Ltd., a wholly owned  subsidiary of
Shamir,      established, together with Einit Ltd., Shamir-Einit Ltd., a company that
distributes our products in the Israeli      market. Shamir Special Optical Products Ltd.
and Einit Ltd. own equal shares in Shamir-Einit Ltd.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 4.D PROPERTIES, PLANT
AND EQUIPMENT

Our
principal executive offices and our primary manufacturing facilities are located in
Kibbutz Shamir in northern Israel and in Kibbutz Eyal in central Israel. At these
facilities we produce molds and semi-finished glass and plastic lenses. See
Manufacturing Operations. We sublease the facilities in Shamir from
Kibbutz Shamir. See Item 7. Major Shareholders and Related Party Transactions.
Together, the Shamir group facilities in Israel cover approximately 10,690 square meters
of manufacturing, warehouses and office space.

We
also own optical laboratories in Portugal and the United Kingdom, which occupy
approximately 2,000 square meters and 1,001 square meters of owned and leased
manufacturing and office space, respectively. In addition, on June 27, 2005, one of our
partially-owned subsidiaries established a laboratory facility in Turkey, which occupies
approximately 1,850 square meters. In establishing this facility, our subsidiary acquired
the assets of the laboratory from another laboratory in Turkey for a purchase price of
approximately $2.6 million. Following the acquisition, we have purchased a building for
approximately $0.9 million. Our partially owned distributors in the United States, France,
Germany, Spain, South Africa and Portugal also lease or own storage and office facilities
in which they conduct their operations.

The following table gives an overview
of our material properties, plants and facilities:

|Name/Location              | Company                              | Primary Use            | Size  | Leased/Owned
|-------------------------- | ------------------------------------ | ---------------------- | ----- | ------------
|
|
|
|
|Kibbutz Shamir, Israel     | Shamir Optical Industry Ltd          | Headquarters;          | 6,500 | Leased      
|                           |                                      | administration;        |       |             
|                           |                                      | manufacturing          |       |             
|                           |                                      |                        |       |             
|Kibbutz Eyal, Israel       | Eyal Optical Industry (95) Ltd       | Administration;        | 3,997 | Leased      
|                           |                                      | manufacturing          |       |             
|                           |                                      |                        |       |             
|Kibbutz Shamir, Israel     | Shamir Special Optical Products Ltd. | Administration         | 120   | Leased      
|                           |                                      |                        |       |             
|Jerusalem, Israel          | Shamir Einit Ltd.                    | Administration;        | 73    | Leased      
|                           |                                      | distribution warehouse |       |             
|                           |                                      |                        |       |             
|Vilar, Portugal            | Altra Optica Lda.                    | Optical laboratory     | 2,000 | Owned       
|                           |                                      |                        |       |             
|Madrid, Spain              | Altra Optica espanna SL              | Distribution warehouse | 360   | Leased      
|                           |                                      |                        |       |             
|Barcelona, Spain           | Altra Optica espanna SL              | Distribution warehouse | 210   | Leased      
|                           |                                      |                        |       |             
|Paris, France              | Altra France                         | Distribution warehouse | 5,000 | Owned       
|                           |                                      |                        |       |             
|Paris, France              | Sarl Interoptic                      | Optical laboratory;    | 249   | Leased      
|                           |                                      | Distribution warehouse |       |             
|                           |                                      |                        |       |             
|Istanbul, Turkey           | Altra Turkey                         | Optical laboratory;    | 1,850 | Owned       
|                           |                                      | Distribution warehouse |       |             
|                           |                                      |                        |       |             
|Niederau, Germany          | Altra Trading GmbH                   | Distribution warehouse | 1,765 | Owned       
|                           |                                      |                        |       |             
|Cambridge, United Kingdom  | Altra Optics UK Limited              | Optical laboratory     | 1,001 | Leased      
|                           |                                      |                        |       |             
|San Diego, California      | Shamir Insight, Inc.                 | Distribution warehouse | 1,500 | Leased      
|                           |                                      |                        |       |             
|Agoura Hills, California   | Shamir USA, Inc.                     | Administration         | 1,200 | Leased      
|                           |                                      |                        |       |             
|Johannesburg, South Africa | Spherical Optics (Pty.) Ltd.         | Distribution warehouse | 200   | Leased      

On
August 8, 2006, our shareholders, at an extraordinary general meeting, resolved to approve
a loan to Kibbutz Shamir in the amount of up to US$ 4.4 million in order to assist the
Kibbutz with the construction of a new manufacturing facility for high index lenses other
than our current facilities in the Kibbutz that shall serve Shamir Special Optical
Products Ltd. The asset shall have a total area of approximately 17,000 square meters out
of which approximately 7,000 square meters will be a building area. In addition, Shamir
Special Optical Products Ltd. currently plans to invest approximately $5.0 million in
machinery and industry equipment. We anticipate that construction of this facility will
begin in the second half of 2006 and will be completed during the second half of 2007.

27

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---



# ITEM 4E. UNRESOLVED
STAFF COMMENTS

None.

# ITEM 5. OPERATING AND
FINANCIAL REVIEW AND PROSPECTS

The
following discussion and analysis should be read in conjunction with our consolidated
financial statements and accompanying notes, which appear elsewhere in this annual report.
This discussion contains forward-looking statements that involve risks and uncertainties.
See Forward-Looking Statements. Our actual results could differ materially
from those anticipated in these forward-looking statements, including as a result of
various factors discussed below and included elsewhere in this annual report, particularly
under the heading Key InformationRisk Factors.

We
prepare our financial statements in accordance with U.S. GAAP, and our reporting currency
is the U.S. dollar. We generate revenues and incur expenses principally in dollars, euros
and NIS. Certain amounts in this annual report are subject to rounding adjustments.

# Overview

We
are a leading provider of innovative products and technology to the progressive spectacle
lens market. Utilizing our proprietary technology, we develop, design, manufacture and
market progressive lenses that we sell to the ophthalmic market. In addition, we utilize
our technology to provide design services to optical lens manufacturers under service and
royalty agreements. Our leading lenses are marketed under a variety of trade names,
including Shamir Genesis, Shamir Piccolo, Shamir Office and Shamir Autograph.

We
believe that we have one of the worlds pre-eminent research and development teams
for progressive lenses, molds and complementary technologies and tools. We have developed
software dedicated to the design of progressive lenses. This software is based on our
proprietary mathematical algorithms that optimize designs of progressive lenses. We have
also created software tools specifically designed for our research and development and
production requirements. To maintain our technological leadership, we have pursued
investments in new technologies in the ophthalmic field through subsidiaries that we
established to focus on research and development activities.

# Presentation of
Financials after Reorganization

On
March 6, 2005 we changed our legal structure from an agricultural cooperative society
(A.C.S.) to an Israeli limited liability company. See Item 3. Key Information 
Corporate Reorganization. As the A.C.S. was a pass-through tax entity, the tax
liability in respect of our operations was not charged to the company but to the owners,
pro rata to their holding in the A.C.S. For comparison purposes, we have included in our
financial statements and in the selected consolidated financial data in this annual report
our pro forma net income, which reflects income taxes we would have paid during the
historical periods presented, assuming we had been a tax-paying limited liability company
during that time.

# 5.A OPERATING RESULTS

# Functional Currency and
Exchange Rate Fluctuations

The
functional currency of Shamir and certain of our subsidiaries is the U.S. dollar, as the
dollar is the primary currency of the economic environment in which we and certain of our
subsidiaries operate and expect to continue to operate in the foreseeable future.

The
functional currency of Altra, our European distribution subsidiary, and most of its
subsidiaries, is the euro. Accordingly, Altras assets and liabilities are translated
at the year-end exchange rate, and statement of income items are translated at the average
exchange rate during the reported period. In 2003 and 2004, the translation adjustments
between the dollar and the euro materially impacted our revenues, cost of revenues and
other operating expenses.

We
generate our revenues primarily in euros and dollars, and we incur a significant portion
of our expenses in euros and NIS (the latter principally in connection with salaries and
related expenses of our staff in Israel). A fluctuation in the value of the euro compared
to the dollar may have a material impact on our revenues, which is often partially offset
by expenses in euro and by price adjustments for some of our euro-priced products to
compete with competitors dollar-priced products. In addition, a fluctuation in the
value of the NIS compared to the dollar may have a material impact on our expenses.

28

---

---



Revenue
growth in Europe was 25.2% in 2003 and 21.8% in 2004, and the average euro-to-dollar
exchange rate increased by 16.1% and 7.7% during the same periods. The impact of these
increases on our revenues was partially offset by price adjustments for our euro-priced
products. Please see  Results of OperationsYear Ended December 31, 2004
Compared To Year Ended December 31, 2003 for a discussion and quantification of the
effect of the fluctuations in the exchange rates between the dollar and the other
currencies in which we do business on certain line items of our income statement.

In
fiscal year 2005 the average euro-to-dollar exchange rate increased by 1.3%. This increase
had no material impact on our results of operations.

# Revenues, Net

We
generate revenues both from selling spectacle lenses to laboratories and opticians and
from providing design services to third party manufacturers. Our lenses are sold primarily
under Shamir brands through distributors, including our majority-owned subsidiaries.
Design services are provided under contracts with other lens manufacturers and include
research and development services, production of molds for lenses, and royalties from the
sale of lenses made utilizing our designs. In the last three years, we have experienced
significant growth in the sale of our lenses, as we have focused our efforts on the
marketing and distribution of our own lenses and as our superior designs gain greater
acceptance in the market. From 2003 to 2005, revenues from the sale of lenses increased by
approximately 17.2%, while revenues from design services did not undergo significant
change. We generate revenue mainly in the period between the beginning of the project and
the completion of the main prototype. Following this completion, there is a period during
which we receive only limited revenue, if any, from adjustments and improvements to the
prototype. Upon commencement of the production stage, we receive revenue from the sales of
molds and royalties from sales of lenses made from our designs. Sometimes we produce and
sell to customers semi-finished lenses based on the design which we develop for them; we
recognized this as sales of lenses.

We
anticipate that revenues from the sale of lenses will continue to provide the majority of
our revenues. Our free form technology was released in the first quarter of 2004. Since
then, we have released new and upgraded versions of this technology. In recent months we
have increased placements of our free form technology worldwide. Revenues generated from
this technology in 2005 were not significant.

# Lenses

Our
primary source of revenues is the sale of semi-finished and finished progressive lenses
and other lenses. Semi-finished lenses are sold through our distributors, Shamir Insight
and Altra; finished lenses are sold throughout Europe by our optical laboratories in
Portugal and the United Kingdom and also in Turkey. We recently established, through
Altra, an additional distribution center in France, through which we expect to increase
our sales of finished lenses. Revenues from lenses are recognized when delivery has
occurred.

# Design Services

We
also generate revenues from design services that we provide to third party manufacturers.
We design progressive lenses and produce molds according to the specifications provided to
us by our third party manufacturer customers. Design service revenues are recognized at
the time research and development services are provided, upon delivery of molds and when
royalties are due.

The
following table shows our revenues by product category, in thousands of dollars:

|                    | Year Ended December 31,
|------------------- | -----------------------
|
|
|
|
|Lenses              |                        
|Design services     |                        
|                    |                        
|Total revenues, net |                        
|                    |                        

The
increase in our revenues from the sale of lenses was primarily due to the success of the
increased marketing activities of Shamir Insight, our U.S. lens distribution subsidiary,
and Altra, our European lens distribution subsidiary. Shamir Insight sales increased from
$8.7 million in 2003 to $17.6 million in 2005. Over the same period, Altra sales increased
from $34.0 million to $44.8 million. In addition to the distribution through Shamir
Insight and Altra, we also sell our lenses through local distributors in other countries.
Aggregate revenues in these other jurisdictions accounted for approximately 13.8% of our
sales of lenses in 2005.

29

---

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The
following table shows our revenues by geographic region, in thousands of dollars:

|                    | Year Ended December 31,
|------------------- | -----------------------
|
|
|
|
|Europe              |                        
|United States       |                        
|Asia                |                        
|Israel              |                        
|Others              |                        
|                    |                        
|Total revenues, net |                        
|                    |                        

# Cost of Revenues

Our
cost of revenues consists primarily of manufacturing costs incurred in the production of
lenses and molds, and is comprised mainly of raw materials, salaries and other personnel
expenses for employees engaged in the manufacture of our products. Other expenses include
sub-contractor services, depreciation on property and equipment, rent and utilities. In
recent years we have made moderate improvements in cost of revenues through increased
efficiency, mainly by reducing waste. Our cost of revenues is affected, directly or
indirectly, by a number of factors, as follows: mixture of products, currency
fluctuations, the establishment or purchase of new production facilities and increased
focus on production technologies that have a high added value.

# Gross Profit

Our
gross profit margin was approximately 50% for the year ended December 31, 2003, 53% for
the year ended December 31, 2004, and 55% for the year ended December 31, 2005. We have
maintained our margins throughout this period notwithstanding a significant increase in
manufacturing costs corresponding to the significant increase in lens revenues. The slight
increase in design services also contributed to the increase in our gross margin.
Establishing new distribution centers and new production facilities (in France, the United
Kingdom, Turkey and Israel) and expanding production activities in Portugal and Israel may
cause a decrease in our gross profit margin. However, upon completion of these steps, we
expect our gross profit margin will return to its historical levels.

# Research and Development

Our
research and development costs consist primarily of salaries and other personnel-related
expenses of employees, principally engaged in research and development activities. We also
incur external engineering fees, materials costs and other overhead expenses in connection
with the design and development of our products. Research and development expenses related
to our design services are included in research and development costs instead of cost of
revenues because we generally retain ownership of the intellectual property arising from
our work. We expense all our research and development costs as incurred. As we expand our
operations, we expect our research and development expenditures to increase in absolute
dollar terms and to remain at approximately the same level as a percentage of revenues.

# Selling and Marketing

Our
selling and marketing expenses consist primarily of salaries, commissions and other
personnel-related expenses for those of our employees principally engaged in the sale and
marketing of our products. Compensation for sales managers and sales representatives is
based to a significant extent on commissions related to performance. Additional expenses
include advertising, trade shows, other promotional costs, and office expenses related to
sales and marketing.

As
we increase our marketing activities by establishing or purchasing companies in areas in
which we do not have direct presence, such as in France, the United Kingdom, Turkey and
South Africa, we incur significant initial operational expenses. We do not, however,
immediately begin to generate revenues from such expenditures.

We
expect our selling and marketing expenses to increase in absolute dollar terms as we
increase our sales and marketing efforts in the United States, Europe and in emerging
markets. While such expenses may increase as a percentage of our revenues over in the near
term, we do not expect this to continue in the medium term.

# General and
Administrative

Our
general and administrative expenses consist primarily of salaries and other
personnel-related expenses for executive, accounting and administrative personnel,
professional fees, office expenses and other general corporate expenses. We expect our
general and administrative expenses to increase in absolute dollar terms and to remain at
approximately the same level as a percentage of revenues due to increased expenditures
associated with increases in our management personnel worldwide.

30

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# Financial Income
(Expenses) and other, Net

Financial
expenses consist of interest income from our cash ,cash equivalents and short term
investments offset by interest expenses on borrowings. Financial expenses also incorporate
adjustments due to exchange rate fluctuations.

# Stock-Based Compensation

We
recorded stock-based compensation expenses in our financial statements in accordance with
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock
Issued to Employees and FASB Interpretation (FIN) No. 44,
Accounting for Certain Transactions Involving Stock Compensation in accounting
for its employee share option plan. Under APB No. 25, when the exercise price of an
employee share option is equivalent to or above the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

On
January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, the
compensation cost relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity issued.
Accordingly, the adoption of SFAS No. 123(R)s fair value method will have a
significant impact on the Companys result of operations, although it will have no
impact on its overall financial position. However, had the Company adopted SFAS No. 123(R)
in prior periods, the impact of the Standard would have approximated the impact of SFAS
No. 123 as described in the disclosure of pro forma net loss and net loss per share in
note 2(s) of our consolidated financial statements. See Recent Accounting
Pronouncements.

# Equity in Losses of
Affiliates, Net

Equity
in losses of affiliates is shown in our consolidated financial statements primarily to
reflect our 18.7% and 50% holdings in e-Vision and Shamir-Or, respectively, as of December
31, 2003 and our 19.5% and 50% holdings in e-Vision and Shamir-Or, respectively, as of
December 31, 2004 and 2005.

# Minority Interests in
Losses (Earnings) of Subsidiaries

Minority
interests are shown in our consolidated financial statements to reflect our non-wholly
owned subsidiaries. Our minority interest in Eyal decreased from 49% to 2% in December
2003 and was eliminated in May 2004. We have a 49%. minority holding in Altra. During 2005
we purchased an additional 33.3% holding in Shamir Insight, Inc., and, as a result, the
minority holding in Shamir Insight, Inc. decreased to 10%.

# Pro Forma Additional
Taxes on Income

Our
taxes on income consist of changes in deferred tax assets or liabilities and provisions
for taxes on income resulting from the activities of our subsidiaries worldwide. On March
6, 2005, we changed our legal structure from an agricultural co-operative society (A.C.S.)
to an Israeli limited liability company. As the A.C.S. was a pass-through tax entity, the
tax liability was not charged to the company but directly to the owners, pro rata to their
holdings in the A.C.S. For comparison purposes, we have included in our financial
statements for the years 2003 and 2004 and in the selected consolidated financial data in
this annual report our pro forma net income, which reflects additional income taxes we
would have recorded during the historical periods presented, assuming we had been a
limited liability company during that time. Our effective tax rate may vary from period to
period based on changes in estimated taxable income or loss, changes to the valuation
allowance, changes to state or foreign tax laws, future expansion into geographic areas
with varying country, state and local income tax rates, deductibility of certain costs and
expenses by jurisdiction and as a result of acquisitions, divestitures and
reorganizations.

31

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# Operating Results

The
following table sets forth certain operating data as a percentage of total revenues for
the periods indicated:

|                                                       | Year Ended December 31,
|------------------------------------------------------ | -----------------------
|
|
|
|
|Revenues, net                                          |                        
|Cost of revenues                                       |                        
|                                                       |                        
|Gross profit                                           |                        
|Operating expenses:                                    |                        
|Research and development                               |                        
|Selling and marketing                                  |                        
|General and administrative                             |                        
|Stock-based compensation                               |                        
|                                                       |                        
|Total operating expenses                               |                        
|                                                       |                        
|Operating income                                       |                        
|Financial income (expenses) and other, net             |                        
|                                                       |                        
|Income before taxes on income                          |                        
|Taxes on income                                        |                        
|                                                       |                        
|Income after taxes on income                           |                        
|Equity in losses of affiliates, net                    |                        
|Minority interest in losses (earnings) of subsidiaries |                        
|                                                       |                        
|Net income                                             |                        
|                                                       |                        
|Pro forma - additional taxes on income                 |                        
|                                                       |                        
|Pro forma net income                                   |                        
|                                                       |                        

Year Ended December 31,
2005 Compared To Year Ended December 31, 2004

Revenues,
Net. Total revenues were $80.4 million for the year ended December 31, 2005, an
increase of $9.1 million or 12.8% compared to total revenues of $71.3 million for the year
ended December 31, 2004. The increase was primarily attributable to increased sales in the
United States and Europe through our subsidiaries Shamir Insight and Altra. Increased
marketing activities in the United States resulted in $4.4 million of sales growth, while
increased demand in Europe contributed approximately $2.0 million. The sale of lenses to
the rest of the world and to other third-party manufacturers in 2005 increased by $1.8
million compared to 2004. Revenues generated from services to third-party manufacturers,
including design services, mold production and royalties, increased by $0.9 million
between these periods, mainly as a result of increases in customers contractual
obligations.

Cost
of Revenues. Cost of revenues was $36.0 million for the year ended December 31, 2005,
an increase of $2.6 million or 7.8% compared to cost of revenues of $33.4 million for the
year ended December 31, 2004. The increase in cost of revenues was primarily due to an
increase in the number of lenses produced and in sub contractors expenses. As a
percentage of revenues, our cost of revenues decreased from 46.9% for 2004 to 44.8% for
2005, due to moderate improvements in efficiency of production and increase in our design
service revenues.

Research
and Development. Research and development costs were $1.7 million for the year ended
December 31, 2005, a decrease of $0.1 million or 8.4% compared to research and development
costs of $1.8 million for the year ended December 31, 2004.

Selling
and Marketing. Selling and marketing expenses were $23.3 million for the year ended
December 31, 2005, an increase of 4.4 million or 23.4% compared to selling and marketing
expenses of $18.9 million for the year ended December 31, 2004. Selling and marketing
expenses increased primarily due to increased marketing activities in Europe (primarily in
the United Kingdom and France) and in Turkey, and to the expansion of our U.S. sales and
marketing force and the increase in related commissions. As a percentage of revenues,
sales and marketing expenses increased from 26.5% for 2004 to 29.0% for 2005.

General
and Administrative General and administrative expenses were $6.6 million for the year
ended December 31, 2005, an increase of $2.1 million compared to general and
administrative expenses of $4.5 million for the year ended December 31, 2004. This
increase was attributable to the expenses of being a public company and increases in
management personnel worldwide. Consistent with the growth we experienced in our business,
general and administrative expenses increased as a percentage of revenues from 6.3% for
2004 to 8.2% for 2005.

Stock-Based
Compensation. Stock-based compensation expenses increased by $0.5 million from $0.1
million for the year ended December 31, 2004 to $0.6 million for the year ended December
31, 2005. Expenses incurred in 2005 were in connection with a grant of options in August
2004 and during 2005. In the year ended December 31, 2004, stock-based compensation
expenses were in connection with a grant of options in August 2004.

32

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Financial
Income (Expenses) and other, Net. Net financial income (expenses) and other were $0.4
million for the year ended December 31, 2005, a positive change of $1.3 million compared
to net financial expenses and other of ($0.9) million for the year ended December 31,
2004. This positive change occurred primarily due to interest income from the proceeds of
the initial public offering of our common shares and lower interest expenses on short-term
and long-term loans in 2005.

Taxes
on Income and Pro Forma Additional Taxes on Income (see Presentation of
Financials after Reorganization). Taxes on income were $4.5 million for the year
ended December 31, 2005, an increase of $1.2 million compared to taxes on income and pro
forma additional taxes on income of $3.3 million for the year ended December 31, 2004. The
increase is attributable mainly to the increase in earnings of Shamir and Eyal.

In
connection with the tax status change, the Company recognized a $0.4 million one-time,
non-cash tax expense.

Equity
in Losses of Affiliates, Net. There was no such loss in the year ended December 31,
2005. Equity in losses of affiliates was $0.05 million for the year ended December 31,
2004.

Minority
Interests in Losses (Earnings) of Subsidiaries. Minority interests in losses were $0.1
million for the year ended December 31, 2005, a decrease of $1.4 million compared to
minority interests in earnings of $1.3 million for the year ended December 31, 2004. This
decrease of minority interest in earnings was primarily attributable to the decrease in
profit of our minority interest in Altra and our acquisition of 33.3% of Shamir Insight,
Inc.

Year Ended December 31,
2004 Compared To Year Ended December 31, 2003

Revenues,
Net. Total revenues, net were $71.3 million for the year ended December 31, 2004, an
increase of $11.2 million or 18.6% compared to total revenues of $60.1 million for the
year ended December 31, 2003. The increase was primarily attributable to increased sales
in the United States and Europe through our subsidiaries (Shamir Insight and Altra), as
well as the positive impact of exchange rate fluctuations. Increased marketing activities
in the United States resulted in $4.4 million of sales growth, while strong demand in
Europe contributed $6.3 million (including a positive impact of exchange rate fluctuations
in a gross amount of $2.8 million that was partially offset by price reductions). The sale
of lenses to the rest of the world and to other third-party manufacturers in 2004
increased by $0.8 million compared to 2003. Revenues generated from services to
third-party manufacturers, including design services, molds production and royalties,
decreased by $0.3 million between these periods, mainly as a result of a design customer
not receiving design services from us in 2004.

Cost
of Revenues. Cost of revenues was $33.4 million for the year ended December 31, 2004,
an increase of $3.4 million or 11.5% compared to cost of revenues of $30.0 million for the
year ended December 31, 2003. The increase in cost of revenues was primarily due to an
increase in the number of lenses manufactured and the negative impact of exchange rate
fluctuations of $1.0 million. As a percentage of revenues, our cost of revenues decreased
from 49.9% for 2003 to 46.9% for 2004, due to moderate improvements in efficiency of
production.

Research
and Development. Research and development costs were $1.8 million for the year ended
December 31, 2004, a decrease of $0.2 million or 7.3% compared to research and development
costs of $2.0 million for the year ended December 31, 2003. The decrease in research and
development costs was primarily attributable to a decrease in expenses in a certain
project. As a percentage of revenues, research and development costs decreased from 3.3%
for 2003 to 2.6% for 2004.

Selling
and Marketing. Selling and marketing expenses were $18.9 million for the year ended
December 31, 2004, an increase of $5.1 million or 37.4% compared to selling and marketing
expenses of $13.8 million for the year ended December 31, 2003. Selling and marketing
expenses increased primarily due to the expansion of our U.S. sales and marketing force
and related commissions, the acquisition of Interoptic, which contributed $0.8 million to
the expenses, and the negative impact of exchange rate fluctuations, which contributed
$0.6 million to the expenses. As a percentage of revenues, sales and marketing expenses
increased from 22.9% for 2003 to 26.5% for 2004.

General
and Administrative. General and administrative expenses were $4.5 million for the year
ended December 31, 2004, an increase of $0.9 million compared to general and
administrative expenses of $3.6 million for the year ended December 31, 2003. This
increase was primarily attributable to an increase in professional fees and consulting
activities for legal, financial and business development services, as well as the recent
acquisition of an optical laboratory in Cambridge. Consistent with the growth we
experienced in our business, general and administrative expenses increased as a percentage
of revenues from 5.9% for 2003 to 6.3% for 2004.

33

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Stock-Based
Compensation. We recorded stock-based compensation expenses in the amount of less than
$0.1 million for the year ended December 31, 2004 in connection with a grant of options in
August 2004. The options will vest over a period of four years. In the year ended December
31, 2003, we recorded stock-based compensation expenses in the amount of $1.8 million in
connection with options granted to one of our employees on September 30, 2003. These
options were fully vested at the grant date, and the compensation expenses were recorded
immediately in the statement of income.

Financial
Income (Expenses) and Other, Net. Financial income (expenses)and other, net were $0.9
million for the year ended December 31, 2004, a decrease of $0.2 million compared to
financial income (expenses) and other, net of $1.1 million for the year ended December 31,
2003. This decrease occurred primarily due to lower interest expenses on short-term and
long-term loans in the 2004 period.

Taxes
on Income. Taxes on income were $1.5 million for the year ended December 31, 2004, an
increase of $0.4 million compared to taxes on income of $1.1 million for the year ended
December 31, 2003. The increase is attributable mainly to the increase in earnings of Eyal
and the expiration of the two-year period of full tax exemption for a certain approved
enterprise program of Eyal.

Pro
Forma Additional Taxes on Income. Pro forma additional taxes on income were $1.7
million for the year ended December 31, 2004, an increase of $0.5 million compared to pro
forma additional taxes on income of $1.2 million for the year ended December 31, 2003. The
increase in pro forma additional taxes on income was attributable to the increase in the
effective tax rate due to the expiration of the tax benefit period provided by the Israeli
government.

Equity
in Losses of Affiliates, Net. Equity in losses of affiliates, net was $0.05 million
for the year ended December 31, 2004, unchanged from the year ended December 31, 2003.

Minority
Interests in Losses (Earnings) of Subsidiaries. Minority interests in earnings were
$1.3 million for the year ended December 31, 2004, a decrease of $0.3 million or 19.8%
compared to minority interests in earnings of $1.6 million for the year ended December 31,
2003. This decrease of minority interest earnings was primarily attributable to the
acquisition of the remaining minority interest in Eyal.

# Critical Accounting
Policies

The
preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period.
Our estimates, judgments and assumptions are continually evaluated based on available
information and experience; however, actual amounts could differ from those estimates. Our
significant accounting policies are described in Note 2 of the Notes to Consolidated
Financial Statements.

Revenue Recognition

We
recognize revenues in accordance with Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 104 (SAB 104), Revenue Recognition in Financial Statements.
Revenues include sales of lenses to laboratories.

Revenues
from lens sales, net of rebates, are recognized when delivery of the related goods has
occurred, as our significant obligations have been satisfied, title and risk of loss has
passed to the customer and collectibility is probable.

We
have various programs that allow opticians to earn rebates on their accumulated purchases.
These rebates are recognized as a reduction of revenues based on the rebates earned and
the estimated future payments in accordance with EITF 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors
Products).

Design
services are provided to third party manufacturers and include research and development
services, production of molds for lenses and royalties from sales of lenses by third party
manufacturers. Revenues from research and development services are recognized at the time
the services are provided. Revenues from production of molds are recognized upon delivery
of the molds and when other criteria of SAB No. 104 are met. Revenues from minimum
royalties are recognized when the royalties become due. Other royalties are recognized
quarterly, upon the receipt of sales reports from the third-party manufacturer customers.

We
do not have post shipment obligations, customer acceptance and price protection. Our
accounting for revenues is consistently applied across all of our distribution channels.

34

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Inventory Valuation

At
each balance sheet date, we evaluate our inventory balance for excess quantities and
obsolescence. This evaluation includes analyses of sales levels by product line and
projections of future demand. In addition, we write off inventories that are considered
obsolete. Remaining inventory balances are adjusted to the lower of cost or market value.
If future demand or market conditions are less favorable than our projections, additional
inventory write-downs may be required and would be reflected in cost of revenues in the
period the revision is made. Significant unanticipated changes in demand could have a
material and significant impact on the future value of our inventory and reported
operating results. To date, we have not experienced any significant inventory write-offs.

Impairment of Long-lived
Assets

In
accordance with SFAS No. 144, we assess potential impairments to our long-lived assets,
comprised of property, plant and equipment and other intangible assets, when there is
evidence that events or changes in circumstances indicate that the carrying value may not
be recoverable. We recognize an impairment loss when the undiscounted cash flow expected
to be generated by an asset (or group of assets) is less than its carrying value. Any
required impairment loss is measured as the amount by which the assets carrying
value exceeds its fair value, and is recorded as a reduction in the carrying value of the
related asset and charged to results of operations.

Deferred Income Taxes

We
record income taxes using the asset and liability approach. Deferred income tax assets and
liabilities are recognized for future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their
respective income tax bases, and net operating loss and tax credit carry-forwards.

On
March 6, 2005 we changed our legal structure from an A.C.S. to an Israeli limited
liability company. The A.C.S. was a pass-through tax entity and was not subject to Israeli
income tax. Our provision for income taxes was not reflected in our historical financial
statements, because the income was passed through to the individual unit holders. For
comparison purposes, we have included in our financial statements for 2003 and 2004 pro
forma net income, which reflects additional income taxes we would have accrued during the
historical periods presented, assuming we had been a limited liability company during that
time. Our effective tax rate may vary from period to period based on changes in estimated
taxable income or loss, changes to the valuation allowance, changes to state or foreign
tax laws, future expansion into geographic areas with varying country, state and local
income tax rates, deductibility of certain costs and expenses by jurisdiction and as a
result of acquisitions, divestitures and reorganizations.

Management
judgment is required in determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded against our net deferred tax
assets. We have considered future taxable income, prudent and feasible tax planning
strategies and other available evidence in determining the need for a valuation allowance.
We evaluate all of these factors to determine whether it is more likely than not that some
portion or all of the deferred income tax assets will not be realized. If the realization
of deferred tax assets in the future is considered more likely than not, an adjustment to
the deferred tax assets would increase net income in the period in which this
determination was made.

Contingencies

From
time to time, we are defendant or plaintiff in various legal actions, which arise in the
normal course of business. We are required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable losses. A
determination of the amount of reserves required for these contingencies, if any, which
would be charged to earnings, is made after careful and considered analysis of each
individual action together with our legal advisors. The required reserves may change in
the future due to new developments in each matter or changes in circumstances, such as a
change in settlement strategy. A change in the required reserves would affect our earnings
in the period the change is made.

# Recent Accounting
Pronouncements

Impact of recently issued
accounting standards

In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.
123 (revised 2004), Share-Based Payment. SFAS No. 123(R) will provide
investors and other users of financial statements with more complete and neutral financial
information by requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured based on
the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a
wide range of share-based compensation arrangements including share options, restricted
share plans, performance-based awards, share appreciation rights and employee share
purchase plans. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes APB No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with employees.
However, that Statement permitted entities the option of continuing to apply the guidance
in APB No. 25, as long as the footnotes to financial statements disclosed what net income
would have been had the preferable fair-value-based method been used. Public entities will
be required to apply SFAS No. 123(R) as of the first annual reporting period that begins
after June 15, 2005.

35

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As
permitted by SFAS No. 123, the Company currently accounts for share-based payments to
employees using APB No. 25s intrinsic value method. Accordingly, the adoption of
SFAS No. 123(R)s fair value will have a significant impact on the Companys
results of operations, although it will have no impact on its overall financial position.
The Company plans to adopt SFAS No. 123(R) using the modified prospective
method. Under this method, companies are required to recognize compensation cost for
share-based payments to employees based on their grant-date fair value from the beginning
of the fiscal period in which the recognition provisions are first applied. Measurement
and recognition of compensation cost for awards that were granted prior to, but not vested
as of, the date SFAS No. 123(R) is adopted would be based on the same estimate of the
grant-date fair value and the same recognition method used previously under SFAS No. 123
(either for financial statement recognition or pro forma disclosure purposes). Any
adjustments to recognize share-based liabilities at fair value (as opposed to intrinsic
value under APB No. 25) will be recognized as the cumulative effect of a change in
accounting principle. For those awards that are granted, modified, or settled after SFAS
No. 123(R) is adopted, compensation cost will be measured and recognized in the financial
statements in accordance with the provisions of SFAS No. 123(R). Prior periods would not
be restated.

For
periods prior to adoption, the financial statements are unchanged, and the pro forma
disclosures previously required by SFAS No. 123 will continue to be required under the new
Standard to the extent those amounts differ from those in the statements of operations.
For periods subsequent to adoption, pro forma disclosures will not be necessary for
periods that begin after the adoption date of the new Standard because the post-adoption
statements of operations will reflect compensation cost for all share-based payments for
which requisite service continues to be provided based on fair value. Additionally, if the
Company did not estimate forfeitures prior to adopting SFAS No. 123(R), forfeitures will
have to be estimated upon adoption. Those companies are required to recognize a cumulative
effect of a change in accounting principles to reverse compensation cost recognized in the
financial statements (not cost recognized only in the pro forma disclosures)
in periods prior to the effective date of SFAS No. 123(R) for those awards that are not
expected to vest.

The
impact of the adoption of SFAS 123(R) on future periods cannot be predicted at this time
because it will depend on share-based payments granted in the future. However, had the
Company adopted SFAS No. 123(R) in prior periods, the impact of the Standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net
loss and net loss per share in note 2(s) to our financial statements.

In
March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 (SAB 107)
to give guidance on implementation of SFAS 123(R), which the Company plans to adopt in
implementing SFAS 123(R).

In
May 2005, the FASB issued SFAS No. 154 (SFAS 154), Accounting Changes
and Error Corrections, a replacement of APB No. 20, Accounting Changes
and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements.
SFAS 154 provides guidance on the accounting for ,and reporting of, accounting changes and
error corrections. APB No. 20 previously required that most voluntary changes in
accounting principles be recognized by including in net income for the period of the
change, the cumulative effect of changing to the new accounting principle. SFAS 154
requires retroactive application to prior periods financial statements of a
voluntary change in accounting principles unless it is impracticable. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company does not expect that the adoption of SFAS 154 will
have a material impact on its financial position or results of operations.

In
November 2005, the FASB released FASB Staff Position Nos. FAS 115-1 and FAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments (FSP 115-1), which effectively replaces EITF Issue No. 03-1.
FSP 115-1 contains a three-step model for evaluating impairments and carries forward the
disclosure requirements in EITF Issue No. 03-1 pertaining to securities in an unrealized
loss position. Under the model, any security in an unrealized loss position is considered
impaired; an evaluation is made to determine whether the impairment is other than
temporary; and, if an impairment is considered other-than-temporary, a realized loss is
recognized to write the securitys cost or amortized cost basis down to fair value.
FSP 115-1 references existing other than temporary impairment guidance for determining
when an impairment is other than temporary and clarifies that subsequent to the
recognition of an other-than-temporary impairment loss for debt securities, an investor
shall account for the security using the constant effective yield method. FSP 115-1 is
effective for reporting periods beginning after December 15, 2005, with earlier
application permitted. The Company adopted FSP 115-1 upon issuance. The adoption of the
Standards did not have a material effect on the Companys consolidated financial
condition or results of operations.

36

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# 5.B LIQUIDITY AND
CAPITAL RESOURCES

From
the commencement of our business through December 31, 2005, we have self-funded and grown
our business principally from cash flow from operations. As of December 31, 2004, we had
raised a total of 8.1 million in net proceeds from private placements of our shares, with
$4.1 million in 1999 and $4.0 million in 2004. In March 2005, we raised net proceeds of
$42.2 million through the initial public offering of our common shares.

As
of December 31, 2005, we had working capital of $54.7 million, cash and cash equivalents
and short term investments of $42.0 million and unused lines of credit of approximately
$11.2 million.

We
anticipate that the proceeds of the March 2005 offering of our shares and cash flows from
operations will be adequate to fund our capital expenditures and other demands and
commitments through 2007.

The
following table sets forth elements of our cash flows for the periods indicated, in
thousands of dollars:

|                                                    | Year Ended December 31,
|--------------------------------------------------- | -----------------------
|
|
|
|
|Net cash provided by operating activities           |                        
|Net cash used in investing activities               |                        
|Net cash (used in) provided by financing activities |                        

We
conduct our operations primarily in three different regions: Israel, Europe and the United
States. For a description of the different currencies in which we operate, see Item
11. Quantitative and Qualitative Disclosures about Market
RiskForeign Currency Risk.

We
finance acquisitions and purchases of significant fixed assets through loans and working
capital, including the proceeds from the March 2005 offering of our shares. We attempt to
take these loans in the same currency in which the cash flow from the acquired assets will
be generated.

We
anticipate that we will be able to meet our short-term liquidity needs through our working
capital and that we will be able to meet our long-term liquidity needs, which may include
investments in facilities, acquisitions and fixed assets, through long-term loans and the
proceeds from our March 2005 offering of our common shares. While we cannot predict the
outcome of any legal disputes in which we may be involved or estimate the amounts of
damages we may be required to pay, we do not expect that our short- or long-term liquidity
or our results of operations will be materially impacted by any current legal proceedings
(see Item 8. Financial InformationLegal Proceedings).

Our
operating activities provided cash of $11.7 million, $9.1 million and $10.0 million for
the years ended December 31, 2003, 2004 and 2005, respectively. The change in net cash
provided by operating activities reflects the growth in sales activity as well as our
increased profitability and increasing levels of collection of accounts receivable netted
against other working capital items. As revenues grow, we anticipate that our trade
receivables and inventory will continue to grow, requiring an increase in our required
level of working capital.

Our
investing activities used cash of $4.4 million, $6.2 million and $26.7 million for the
years ended December 31, 2003, 2004 and 2005, respectively. The 2005 figure includes $14.3
million of short term investments purchased using the proceeds of our initial public
offering. Over the last three years, cash used in investing activities was primarily
driven by the purchase of property and equipment, as well as the acquisition of our
subsidiary, Cambridge Optical in 2004 and the acquisition of additional shares in Shamir
Insight, Inc. and the establishment of Altra Turkey in 2005.

Our
financing activities used cash of $4.3 million and $2.8 million for the years ended
December 31, 2003 and 2004, respectively. For the year ended December 31, 2005 our
financing activities provided cash of $38.5 million.

Until
December 31, 2004 a principal source of cash from financing activities was the receipt of
long-term loans and short-term bank credit. However, repayment of long-term loans have
either largely offset or exceeded receipt of credit for each of these periods.
Distribution of earnings, which totaled $4.3 million and $6.6 million at December 31,
2003, and 2004, respectively, was the largest use of cash for financing activities.

In
March 2005 we received $42.2 million in net proceeds from our initial public offering,
after which we paid a dividend in the amount of $5.2 million. The receipt of long-term
loans was due to our financing of new operations through Altra in Turkey, France and the
United Kingdom, which was offset by repayment of long term loans (mainly corporate loans).

37

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# Borrowings

As
of December 31, 2005, we had aggregate short-term (including current maturities of
long-term loans) and long-term bank borrowings of $10.0 million and $5.1 million,
respectively. These borrowings are divided between our subsidiaries and us as follows:
$12.9 million is held by Altra, $2.2 million is held by Eyal and Eyal Holdings These
borrowings consist of various notes denominated in dollars, euros, and NIS, with interest
rates (in various currencies and linked to various indices) ranging from approximately
3.3% to 5.4 %, a weighted average interest rate of approximately 4.3%. These aggregate
bank borrowings included short-term bank loans of $7.8 million, denominated in euros, with
a weighted average interest rate of 3.8%, and short-term bank credits of $0.6 million,
mostly denominated in euros, with a weighted average interest rate of 3.5%.

Long-term
bank borrowings include $5.1 million in euros with a weighted average interest rate of
4.9%, $0.1 million in dollars with a weighted average interest rate of 5.4%, and $1.5
million in NIS with a weighted average interest rate of 4.6%.

# 5.C RESEARCH AND
DEVELOPMENT, PATENTS AND LICENSES, ETC.

We
have a strong focus on research and development, and the success of our business
depends substantially on the results of our Research and development activities. We conduct Research and development both to
enhance our existing proprietary technologies and to develop new technologies.

We
believe that we have one of the worlds preeminent research and development teams for
progressive lenses, molds and complementary technologies and tools. Through our research
and development team, we have continually enhanced our capabilities and resources to
develop new, innovative products and design tools with superior characteristics.

We
have developed software dedicated to the design of progressive lenses. This software is
based on our proprietary mathematical algorithms that optimize designs of progressive
lenses for a variety of activities and environments. We have also created software tools
specifically designed for our research and development and production requirements,
including our Eye Point Technology software that simulates human vision. We believe that
these proprietary tools, and in particular our optical design software and our Eye Point
Technology, provide us with a competitive advantage in our market. To maintain this
advantage, we have pursued investments in new technologies in the ophthalmic field and are
developing product technologies in fields such as lens development, lens production and
optical measurement and simulation.

For
a more detailed discussion of our research and development activities, see Item 4.
Information on the CompanyCompetitive StrengthsResearch and Development
Expertise andResearch and Development.

Research
and development spending for fiscal years ending December 31, 2005, 2004, and 2003 was
$1.7 million, $1.8 million and $2.0 million, respectively.

# 5.D TREND INFORMATION

For
a discussion of trend information, see Item 4. Information on the
CompanyIndustry OverviewMarket Growth.

# 5.E OFF- BALANCE SHEET
ARRANGEMENTS

None

38

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# 5.F CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS

The
following table summarizes our contractual and commercial obligations and commitments as
of December 31, 2005 in thousands of dollars:

|                                            | Payments Due In
|------------------------------------------- | ---------------
|
|
|
|
|Contractual obligations:                    |                
|Long-term debt (without loans from minority |                
|shareholders in subsidiaries) (1)           |                
|Operating lease obligations                 |                
|Loans from minority shareholders in         |                
|subsidiaries (2)                            |                
|                                            |                
|Total contractual obligations               |                
|                                            |                

| | (1) | Does
not include interest due.
| | --- | ------------------------------

| | (2) | No
repayment date was set in connection with such loans.
| | --- | --------------------------------------------------------

# ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES

# 6.A DIRECTORS, SENIOR
MANAGEMENT

The
following table lists the current members of our board of directors and our executive
officers. The address for our directors is c/o Shamir Optical Industry Ltd, Kibbutz
Shamir, Upper Galilee, 12135 Israel. Giora Ben-Zeev and Rami Ben-Zeev are brothers, and
Orly Hayardeny-Felner and Eyal Hayardeny are married. Other than the above mentioned,
there are no other family relationships among members of our board or our executive
officers.

|Name                  | Age |  | Position/Principal Occupation                                
|--------------------- | --- |  | -------------------------------------------------------------
|
|
|
|
|Giora Ben-Zeev(1)(2)  | 63  |  | Director; President and Chief Executive Officer              
|Dan Katzman           | 51  |  | Chief Engineer, Vice President                               
|Dagan Avishai(1)(2)   | 46  |  | Executive Vice President, Vice President Marketing           
|Amir Hai(6)           | 40  |  | Chief Financial Officer                                      
|Rami Ben-Zeev(1)(2)   | 57  |  | Vice President                                               
|Eyal Hayardeny        | 36  |  | Executive Vice President, Vice President Business Development
|Yair Shamir(3)        | 60  |  | Director and Chairman of the Board                           
|Uzi Tzur(1)(4)        | 66  |  | Director                                                     
|Efrat Cohen(2)        | 38  |  | Director                                                     
|Orly Hayardeny Felner | 36  |  | Director                                                     
|Ami Samuels(5)        | 47  |  | Director                                                     
|Amos Netzer(5)        | 50  |  | Director                                                     
|Zeev Feldman(3)       | 54  |  | Director                                                     
|Jed Arkin(3)          | 42  |  | Director                                                     

---

|(1) | Member
of Kibbutz Shamir.
|--- | -------------------------

|(2) | Member
of the management board of Kibbutz Shamir.
|--- | -------------------------------------------------

|(3) | Independent
board member.
|--- | -------------------------

|(4) | Chairman
of the management board of Kibbutz Shamir.
|--- | ---------------------------------------------------

|(5) | External
and independent board member.
|--- | --------------------------------------

|(6) | On
June 6, 2006, Shamir announced that Yagen Moshe will replace Amir Hai as the
               Companys chief financial officer. Mr. Moshe currently serves as
               Shamirs vice president of finance. Mr. Moshes appointment is
               effective as of July 1, 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Giora
Ben-Zeev. Mr. Ben-Zeev has been our President and Chief Executive Officer since 1994.
He was among the founders of our company in 1972 and has worked as Plant Manager,
Marketing Director and Assistant President. Previously, he spent five years as marketing
director at Sher Israel, a gold refinery. He is a member of the management board of
Kibbutz Shamir. Mr. Ben-Zeev graduated from the Technion Israel Institute of Technology in
industrial and management engineering.

39

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Dan
Katzman. Mr. Katzman joined our company in 1981 as an engineer and became Chief
Engineer in 1985. An internationally recognized expert in optical research and
development, he has headed our research and development teams since then. He holds a
degree in mechanical engineering from the Technion Israel Institute of Technology and
serves as an officer in the Israeli Air Force.

Dagan
Avishai. Mr. Avishai has been our Executive Vice President and Vice President of
Marketing since 2003. Prior to joining the company in 1997, he served as financial manager
of Kibbutz Shamir for three years. He is a director at Shalag Industries, Ltd. and a
member of the management board of Kibbutz Shamir. He holds a BA degree in management and
economics from the Ruppin Academic Center and serves as a lieutenant colonel in the
Israeli reserve armed forces.

Amir
Hai. Mr. Hai joined the company in August 1999 and has served as our Chief Financial
Officer since that date. From 1994 to 1999, he was a senior manager with Ernst & Young
responsible for initial public offerings of companies on NASDAQ and on Germanys
Neuer Markt. He holds a BA degree in accounting and management from The College of
Management in Tel Aviv.

Rami
Ben-Zeev. Mr. Ben-Zeev joined our company as business manager and Vice President in
2001. Previously he served as financial manager of Kibbutz Shamir from 1992 to 1995 and as
chief financial officer of Tel Hay Rodman regional college from 1999 to 2001. He is a
member of the management board of Kibbutz Shamir. He holds a BA degree in economics from
Hebrew University of Jerusalem and an Executive MBA from Tel Aviv University.

Eyal
Hayardeny.Mr. Hayardeny joined our company as an Executive Vice President and Vice
President of Business Development in 2005. From 1991 to 1994 he served as a Budget Officer
in the IDFs Chief of Staff Financial Consultant Unit. From 1994 to 1998, he worked
at KMPG Somekh Chaikins Economic department. Since 1998 he has been the owner and
CEO of Lardan  Consulting Ltd., a company that provides a range of economic
consulting services. He holds a BA degree in accounting and economics and an MBA degree
from the Bar-Ilan University.

Yair
Shamir. Mr. Shamir has been the chairman of our board of directors since March 2005.
He is currently the chairman of the board of Israel Aircraft Industry Ltd., VCON
Telecommunications and of Catalyst Fund, an Israel-based venture capital fund investing in
late-stage companies mainly in the technology sector. From June 2004 until January 2005 he
served as chairman of EL AL Israel Airlines, He currently serves as a director of DSPG and
Mercury Interactive, both listed on NASDAQ, and as a director of several private hi-tech
companies. From 1995 to 1997, Mr. Shamir served as executive vice president of the
Challenge Fund-Etgar L.P., an Israeli venture capital firm. From 1994 to 1995, he served
as chief executive officer of Elite Food Industries Ltd., one of Israels largest
branded food products companies. From 1988 to 1993, he served as executive vice president
and general manager of Scitex Corporation Ltd., a leading supplier of computer graphic
systems. From 1963 to 1988, Mr. Shamir served as a pilot in the Israeli Air Force and
attained the rank of colonel. Mr. Shamir holds a B.Sc. in electronic engineering from the
Technion Israel Institute of Technology.

Uzi
Tzur. Mr. Tzur has been a member of our board of directors since its original
establishment in 1997. He served as acting chairman of the board from July 2004 until
March 2005. He is also the current chairman of the management board of Kibbutz Shamir, a
position he has held since 1992. Mr. Tzur is currently a member of the boards of directors
of Shalag Industries, Ltd. and N.R. Spuntech Industries Ltd, the two other companies of
Kibbutz Shamir, which are listed on the Tel Aviv stock exchange. He is also chairman of
the boards of Mishkai Galil Elion, an umbrella organization of all kibbutzim in northern
Israel, and of Hamashbir Hamercazi, an Israeli trading company. He has over twenty years
of experience in different managerial positions. He holds a degree in management and
economics from the Ruppin Academic Center in Israel and is a retired lieutenant colonel of
the Israeli reserve armed forces.

Efrat
Cohen. Mrs. Cohen has been a member of our board of directors since 2001. Since 1997
she has been the chief financial officer of Kibbutz Shamir, and she is a member of the
management board of Kibbutz Shamir. Mrs. Cohen holds a BA degree in economics and
management from the Ruppin Academic Center.

Orly
Hayardeny Felner. Mrs. Hayardeny Felner has been a member of our board of directors
since January 2005. Since 1998 she has been the chief financial officer of FIBI Investment
House Ltd., a shareholder in our company and a subsidiary of FIBI Holding Company Ltd.,
the holding company of the First International Bank of Israel. From 1993 until 1998 she
worked as an accountant at KPMG Somekh Chaikin, certified public accountants, in Israel.
She currently serves as a director of Intergama Investment Company Ltd., Rapac Electronics
Ltd. and Rapac Technologies Ltd., all companies listed on the Tel Aviv Stock Exchange, as
well as of several private companies in which FIBI Investment House Ltd. holds
investments. She holds a BA degree in economics and accounting from Tel Aviv University
and has completed the course work toward an MBA with a specialization in finance from Bar
Ilan University.

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Ami
Samuels. Mr. Samuels has been a member of our board of directors since March 2005. He
is currently a partner at Star Ventures, an international venture capital fund. From 2001
until 2003, he served as senior vice president and chief financial officer of Satlynx, a
company specializing in two-way satellite broadband services. From 1998 until 2001, he was
vice president for broadband networks at Gilat Satellite Networks, and from 1989 until
1998, he was a senior vice president of investment banking at Lehman Brothers. He holds a
BA degree from Haifa University and a masters degree in management from Yale
University.

Amos
Netzer. Mr. Netzer has been a member of our board of directors since March 2005. Since
2000 he has been the managing director of Palram Industries Ltd., a public company traded
on the Tel Aviv Stock Exchange. From 1998 until 2000 he was the managing director of SMS,
a private company engaged in the production and distribution of plastic products to world
markets, which Mr. Netzer also founded. Between 1993 and 1997, he was president of Suntuf,
Inc., a U.S.-based manufacturer of corrugated polycarbonate building panels, and
responsible for the establishment of the North American marketing and distribution network
of Palram-Paltough Ltd. He holds a B.Sc. degree in industry and administrative engineering
from the Technion Institute in Haifa and an MS degree in public policy from Tel Aviv
University.

Zeev
Feldman. Mr. Feldman has been a member of our board of directors since March 2005. He
is currently the chief executive officer of Feldz Investments Ltd. and a member of the
board of directors of Cellcom Israel Ltd., Solbar Industries Ltd., Azimuth Ltd. and Union
Banks Mutual Funds Ltd. From 1998 until 2003 he was the chief executive officer of
FIBI Investment House Ltd. and FIBI Holdings Ltd. He has served as a director on the
boards of FIBI Investment House Ltd., Intergama Ltd., RPK Electronics Ltd., Medison Tech
Ltd., Jordan Gate Projects Ltd. and Elleran Investments Ltd. He holds a BA degree in
economics and accounting from Tel Aviv University and is a certified public accountant.

Jed
Arkin. Mr. Arkin has been a member of our board of directors since March 2005. He
has served as chairman of MadahCom Communications Ltd., a spread-spectrum
communications company, since January 2000; as a director of Orckit
Communications Ltd., a NASDAQ-listed company, since July 2001; as a director of
Corrigent Systems, Ltd., a manufacturer of metro-optical transport equipment, since
December 2003; and as a director of Mosaic Crystals Ltd., a developer of Gallium
Nitride semiconductor materials, since January 2005. From 1999 until 2001, he served as
general manager of merchant banking for Oscar Gruss & Son, a New York-based
investment bank. From 1995 until 1998, he served as vice president of The Challenge Fund,
an Israeli venture capital firm. He holds a B.A. from St. Johns College in
Annapolis, Maryland, an M.B.A. from Harvard Business School and a J.D. from Harvard Law
School.

# Board of Directors

As
a limited liability public company, we are managed by a single board of directors and by
our executive officers. Under the Israeli Companies Law and our Articles of Association,
the board of directors is responsible, among other things, for establishing the
companys policies and overseeing the performance and activities of our chief
executive officer, convening shareholders meetings, preparing and approving our
financial statements, reviewing and approving fundamental strategic, financial and
organizational decisions on behalf of the company, and issuing securities and distributing
dividends. The board also appoints and may remove the chief executive officer of the
company.

Our
board of directors currently consists of nine directors. Two of these directors are
External Directors in accordance with the Israeli Companies Law. See
External Directors. These two directors and three additional directors
qualify as independent directors for purposes of the listing requirements of the NASDAQ
National Market. Pursuant to an agreement among our shareholders, Kibbutz Shamir has
agreed with another shareholder to vote for their respective nominees for membership on
our board. See Item 7. Major Shareholders and Related Party
TransactionsShareholders agreement.

Under
our Articles of Association, our board of directors must have at least two members and no
more than eleven. The members of our board of directors, other than the external
directors, for whom special election requirements apply (see External
Directors), are elected and may in certain circumstances be removed by the majority
of our shareholders. Our Articles of Association provide that our board of directors,
other than the external directors, will be divided into three classes. Each class of
directors will serve for a term of three years. The term of office of the directors
assigned to class A will expire at our second annual meeting of shareholders, which will
take place in the year following and not later than 15 months after the initial annual
meeting of our shareholders, and at each third succeeding annual meeting thereafter. The
term of office of the directors assigned to class B will expire at the third annual
meeting of shareholders, which will take place during the year following but not later
than 15 months after the previous annual meeting, and at each third succeeding annual
meeting thereafter. The term of office of the directors assigned to class C will expire at
the fourth annual meeting of shareholders, which will take place during the year following
but not later than 15 months after the previous annual meeting, and at each third
succeeding annual meeting thereafter. Giora Ben-Zeev, Zeev Feldman and Uzi Tzur serve as
class A directors, Efrat Cohen, Jed Arkin and Orly Hayardeny Felner serve as class B
directors and Yair Shamir serves as the class C director. This classification of the board
of directors may delay or prevent a change of control of our company or in our management.

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If
a vacancy arises because of the death or resignation of a board member, the replacement
can only be appointed at a general meeting of our shareholders. There is no limitation on
the number of terms that a director (other than an external director) may serve. External
Directors may only serve a maximum of two terms of three years each.

The
board of directors appoints its chairman from among its members in accordance with our
Articles of Association. Pursuant to our Articles of Association, the chairman convenes
and presides over the meetings of the board. A quorum consists of two-thirds of the
members of the board, and decisions are taken by a vote of the majority of the members
present. A director may appoint an alternate director to attend a meeting in his or her
place, but this alternate must be approved by the board prior to the relevant meeting.

Directors
are required to comply with all applicable laws and with our Articles of Association. They
may be jointly and severally liable for any actions that they take in violation of their
fiduciary duty and duty of care toward the company and/or others.

The
Israeli Companies Law provides that an Israeli company cannot exculpate an office holder
from liability with respect to a breach of fiduciary duties, but may exculpate in advance
an office holder from liability to the company, in whole or in part, with respect to a
breach of duties of care. Our Articles of Association provide that, subject to any
restrictions imposed by applicable law, we may enter into a contract for the insurance of
the liability of any of our officers and directors with regard to an act performed by them
in their capacity as such and with regard to certain actions specified in the Companies
Law and in our Articles of Association.

In
March 2005 the Israeli Legislature adopted certain amendments to the Companies Law
(Amendment No. 3), including, inter alia, certain amendments to
provisions relating to the Companys ability to provide indemnification to corporate
officers (i) permitting indemnification for expenses incurred in connection with certain
kinds of governmental inquiries or investigation in certain circumstances; and (ii)
changing the standard of limitations imposed on the Companys ability to indemnify
officers for any financial liability imposed by a court judgment. The previous standard
permitted indemnification relating to certain types of events that, in the opinion
of the companys board of directors could be anticipated at the time of granting the
indemnity. Following Amendment No. 3, indemnification is limited to events that are
anticipated in the opinion of the board of directors in light of the actual
activities of the company at the time of granting the indemnity.

On
February 27, 2006, our shareholders at the annual general meeting approved an amendment of
our Articles of Association, essentially making the provisions of the Articles relating to
indemnification of officers consistent with Amendment No. 3.

We
have acquired directors and officers liability insurance covering our officers
and directors and the officers and directors of our subsidiaries against certain claims,
and we are currently in the final stages of providing our directors and officers with
indemnification for liabilities or expenses incurred as a result of acts done by them in
their capacity as directors and officers of our company.

# External Directors

We
are subject to the Israeli Companies Law. Under the Companies Law, Israeli companies whose
shares have been offered to the public in or outside of Israel are required to appoint at
least two External Directors to serve on their board of directors. The External Directors
must be appointed by a special meeting of our shareholders held within three months of the
date we first offered our shares to the public. In addition, each committee of the board
of directors entitled to exercise any powers of the board is required to include at least
one External Director. The audit committee must include all of the External Directors. See
Board Practices below.

A
person may not serve as an External Director if at the date of the persons
appointment or within the preceding 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 with any entity controlling, controlled by or under common control
with us. Under the Israeli Companies Law, Affiliation includes an employment
relationship, a business or professional relationship maintained on a regular basis or
control or service as an office holder, excluding service as a director for a period of no
more than three months during which we first offered our shares to the public.

A
person may not serve as an External Director if that persons position or other
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
of the same gender, then the external director to be appointed must be of the other
gender.

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

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

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

The
Israeli 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 the company. In the event of a
vacancy created by an External Director, our board of directors is required under the
Israeli Companies Law to call a shareholders meeting to appoint a new external director.

External
directors must be compensated in accordance with regulations adopted under the Companies
Law. The regulations provide two alternatives for cash compensation to external directors:
a fixed amount within a range prescribed in the regulations or an amount that is not
higher than the average compensation of other directors who are not controlling
shareholders of the company or employees or service providers of the company or its
affiliates and not lower than the minimum compensation received by any such director. A
company may also 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. The compensation of External Directors
must be communicated to them prior to their consent to serve as External Directors.

# 6.B COMPENSATION OF
DIRECTORS AND MANAGEMENT

We
have paid compensation to the members of our board of directors for their services as
directors as described below. Directors are reimbursed for expenses incurred in order to
attend board or committee meetings. Our executive officers who serve as directors on our
board receive compensation as part of their employment agreement as executive officers but
do not receive any compensation for their service as directors.

We
pay compensation to our External Directors in accordance with the range provided by the
Israeli Companies Law for compensation of External Directors. Since the closing of the
March 2005 initial public offering of our shares, we pay our directors, with the exception
of the chairman of our board of directors and our chief executive officer, compensation of
$1,500 per meeting attended (or $300 per meeting attended by telephone). At our
Extraordinary General Meetings that took place on July 18, 2005, and on August 8, 2005,
our shareholders approved the issuance of options to purchase 23,540 of our common shares
to each of our directors including our External Directors, other than our chairman and our
chief executive officer. We do not plan to pay any compensation to our chief executive
officer for his service as a director.

On
January 1, 2005, we entered into an agreement with the chairman of our board of directors,
Yair Shamir, according to which we will pay him $6,000 per month for his services as
chairman of the board. Pursuant to the agreement, we also agreed to grant Mr. Shamir
options to purchase 160,961 of our common shares. Theses options were granted on March 10,
2006, one year following our initial listing on a U.S. stock exchange. The exercise price
for these options is $12.11 per share, and the options will be exercisable until March 10,
2012. 25% of the options were fully vested on the grant day and the remaining 75% shall
vest in twelve approximated in equal parts on a quarterly basis over the course of the
four years following the grant date. For accounting purposes, we treat these options as
granted as of the date of our agreement with Yair Shamir.

The
aggregate direct compensation we paid to our officers as a group (six persons), either
directly or through Kibbutz Shamir as part of our working services agreement with Kibbutz
Shamir (see Item 7. Major Shareholders and Related Party Transactions) for the
year ended December 31, 2005 was $1.1 million, including amounts set aside or accrued to
provide for pension, retirement or similar benefits. This amount does not include expenses
we incurred for other payments, including dues for professional and business associations,
business travel and other expenses, and other benefits commonly reimbursed or paid by
companies in Israel. We have also granted options to purchase our common shares to our
officers as part of their overall compensation. See Employee Share
Ownership.

As
of the date of this annual report, there were outstanding options to purchase 1,228,880
common shares granted to our directors and officers, at exercise prices ranging from $0 to
$14. See Employee Share Ownership for a description of the options
granted to our officers. These shares may be purchased at a weighted average exercise
price of $8.61 per share.

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# Loans Extended and
Guarantees Provided

We
have not extended any loans to members of our board of directors or to our executive
officers, nor have we guaranteed any loans on their behalf. We have extended a loan of
$370,000 to our majority shareholder, Kibbutz Shamir, and approved an additional loan to
Kibbutz Shamir at our shareholders meeting on August 8, 2005. Three of our directors
and two additional executive officers are members of the management board of Kibbutz
Shamir. See Item 7. Major Shareholders and Related Party TransactionsLoan
Agreement with Kibbutz Shamir.

# 6.C BOARD PRACTICES

Our
board of directors has established three standing committees. The three committees are an
audit committee, a compensation committee and a nominating and governance committee.

Audit Committee

Under
the Israeli Companies Law, the audit committee must consist of at least three independent
directors and must include both of the External Directors. In addition, the rules of the
NASDAQ National Market require that at least one member of our audit committee be a
financial expert. Our audit committee is comprised of Ami Samuels as chairman, Amos Netzer
and Zeev Feldman. Our board of directors has determined that Zeev Feldman qualifies as the
audit committee financial expert. The composition and function of the audit committee meet
the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations
thereunder, as well as the NASDAQ National Market 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 it deems necessary to
satisfy itself that the accountants are independent of management. Under the Israeli
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

The
compensation committee recommends to the board of directors in accordance to issuance of
employee share options under our share option plan, determines salaries and bonuses for
our executive officers and incentive compensation for our other employees. The members of
our compensation committee are Yair Shamir as chairman, Jed Arkin and Amos Netzer. The
composition and functions of the compensation committee meet the requirements of the
NASDAQ National Market rules.

Nominating and Governance
Committee

The
nominating and governance committee makes 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 regarding corporate governance
matters. The members of the nominating and governance committee are Zeev Feldman as
chairman, Jed Arkin and Amos Netzer. The composition and functions of the nominating and
governance committee meet the requirements of the NASDAQ National Market rules.

# Internal Auditor

Under
the Israeli Companies Law, the board of directors of a Public Company must appoint an
internal auditor following the recommendation of its audit committee. The role of the
internal auditor is to examine whether a companys actions comply with the law and
proper business procedure. The internal auditor may be an employee of the company but may
not be an interested party or officer in the company, or a relative of an interested party
or officer, and may not be a member of the companys independent accounting firm or
its representative. The Israeli Companies Law defines an interested party as a shareholder
of 5% or more of the companys issued share capital or of voting rights, or a person
or entity that has the power to appoint one or more directors or the general manager of
the company, or a person who serves in the company as a director or as general manager of
a company. We appointed an internal auditor in June 2005.

44

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# 6.D EMPLOYEES

As
of June 15, 2006, our worldwide workforce consists of 845 people, which includes 37
employees who provide services to us through our working services agreement with Kibbutz
Shamir (see Item 7. Major Shareholders and Related Party Transactions). The
following table shows the breakdown of our workforce by main category of activity and
geographic location as of December 31 for the past four years.

|Department or location        | 2002 | 2003 | 2004 | 2005
|----------------------------- | ---- | ---- | ---- | ----
|
|
|
|
|Research and development      |      |      |      | 33  
|Marketing and sales           |      |      |      | 37  
|Management and administration |      |      |      | 62  
|Manufacturing and warehouse   |      |      |      | 288 
|Total                         |      |      |      | 420 
|                              |      |      |      |     
|                              |      |     
|Israel                        |      |      |      | 292 
|United States                 |      |      |      | 18  
|Europe                        |      |      |      | 110 
|South Africa                  |      |      |      | -   
|Total                         |      |      |      | 420 
|                              |      |      |      |     

We
consider the changes in the numbers of employees in our various departments or geographic
regions to be in line with our expectations for our companys growth. We believe that
our relations with our employees are good. None of our employees work under any collective
bargaining agreements, and we have no relations with any labor unions.

# 6.E SHARE OWNERSHIP

Our
chairman and CEO and other certain officers, other than directors, hold options to
purchase 1,514,892 of our common shares. At our Extraordinary General Meetings on July 18,
2005, and on August 8, 2005, our shareholders approved the issuance of 23,540 options to
our directors (except for the chairman of our board, Yair Shamir, and our CEO, Giora
Ben-Zeev) As described below, these options are held by Giora Ben-Zeev, Amir Hai, Dagan
Avishai, Eyal Hayardeny, Dan Katzman and the chairman of our board of directors, Yair
Shamir. For a description of the options held by our directors, please see
Compensation of Directors and Management.

On
August 24, 2004 our board of directors granted options to purchase 683,120 of our shares
to certain of our executive officers and other employees. Out of these options, the board
granted options to purchase up to 301,376 of our shares to our chief executive officer,
Giora Ben-Zeev, and options to purchase up to 66,973 of our shares to each of our chief
financial officer, Amir Hai, and our executive vice president, Dagan Avishai. The exercise
price for these options was set at $10.30 per share. Also out of these options, the board
granted options to purchase a total of up to 214,312 of our shares to certain employees in
research and development and options to purchase up to 33,486 of our shares to certain
development managers. The exercise price for these options is $12.43. The 33,486 options
for development managers were granted to Dan Katzman. The board authorized our chief
executive officer to finally determine the allocation of the options among the development
employees. Furthermore, the board approved options to purchase an additional 288,360 of
our shares for future grants to directors or employees. On January 1, 2005, we agreed to
grant 160,961 out of these 288,360 additional options to Yair Shamir (see
Compensation of Directors and Management). On August 21, 2005, the
boards compensation committee approved an additional grant to Amir Hai of options to
purchase 33,487 shares at the exercise price of $ 11.55 per share.

On
June 8, 2005, Shamir Insight, Inc., granted options to acquire its shares to two of its
officers. On December 29, 2005, the option grant was cancelled by Shamir Insight, Inc. On
May 15, 2006, our board ratified its compensation committee resolution from March 24,
2006, to grant options to purchase 58,000 of our shares to those executive officers of
Shamir Insight, Inc., at an exercise price of $11.07 per share. The vesting schedule is as
follows: 25% immediately, 25% on May 31, 2006, 30% on January 31, 2007, and 20% on January
31, 2008.

At
the above mentioned resolutions of our Board and Compensation Committee, 100,000 options
were granted to Eyal Hayardeny at an exercise price of $ 9.97 per share. In addition, our
board at the May 2006 meeting has approved a grant of 70,000 options to our consultants, a
consulting company to Eyal.

After
June 15, 2006, Amir Hai will no longer be entitled to exercise 33,486 of his options. His
remaining options will be fully vested on July 1, 2006, with a different exercise price
(50,230 options at an exercise price of $10.3 per share and 16,744 options at an exercise
price of $11.55 per share).

We
intend to grant 50,000 options to our new CFO pursuant to his employment
agreement with Shamir upon the commencing of his employment in the company.

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All
of the options described above are granted pursuant to our 2005 General Share and
Incentive Plan that was approved and adopted by our board on February1, 2006.
The Plan provides that 25% of the shares shall vest one year after the date of grant, and
the remaining 75% shall vest on a monthly basis, with 1/36 of the remaining shares vesting
on each month commencing at the end of the first anniversary of the date of grant.
According to the Plan during the year 2006 we may grant 350,000 options to purchase our
shares and in each following year the option pool shall increase by an additional 280,000
options. As of June 15, 2006, we have granted 286,000 options.

Except
for the options granted to two of the officers of Shamir Insight, Inc., Yair Shamir (whose
vesting period is described in Compensation of Directors and
Management), such consultants, Amir Hai and Eyal Hayardeny, the options that were
granted prior to the adoption of the Plan will vest in four tranches of 25% per year. The
first tranche vested on March 10, 2006. The options were granted and authorized pursuant
to Section 102 of the Israeli Income Tax Ordinance, which grants certain tax advantages to
the employee grantees of options. In order for these tax advantages to take effect, the
options must be held by a trustee, and the underlying shares cannot be sold until the end
of the second fiscal year after the year in which they were granted.

On
September 30, 2003 our board of directors granted options to purchase 167,226 of our
shares to Dan Katzman. The exercise price of these options is less than $0.01 per share.
On the same date, the board granted Mr. Katzman additional options to purchase 167,105 of
our outstanding shares. The exercise price of these options is $2.46 per share. The
options in both tranches are exercisable for a period of ten years following the grant
date and vested immediately. The options were granted pursuant to Section 102 of the
Israeli Income Tax Ordinance and are subject to its holding requirements, as described
above. In addition, our board of directors granted options to purchase 33,486 shares to
Mr. Katzman on August 24, 2004 on the terms described above.

# ITEM 7. MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

# 7.A MAJOR SHAREHOLDERS

The
following table and footnotes set forth information, as of June 15, 2006, regarding the
beneficial ownership of our common shares by:

| | each
person or entity that we know beneficially owns more than 5% of our outstanding common
shares; and
|- | -------------------------------------------------------------------------------------------------------

| | each
of our directors or executive officers who beneficially owns any of our shares.
|- | ------------------------------------------------------------------------------------

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.

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. All of our
shareholders have the same voting rights. Percentage ownership is based on 16,256,514
common shares outstanding as of June 15, 2006. Except as otherwise disclosed, the address
of Kibbutz Shamir and of Dan Katzman is c/o Shamir Optical Industry, Kibbutz Shamir, Upper
Galilee, 12135 Israel. FIBIs address is FIBI Investment House Ltd., 17th
Floor, Africa Israel Building, 14 Ehad Ha-Am Street, Tel Aviv, Israel.

|Name of Beneficial Owner      | Percent of Shares | Number of Shares
|----------------------------- | ----------------- | ----------------
|
|
|
|
|Kibbutz Shamir(1)             |                   |                 
|FIBI Investment House Ltd.(2) |                   |                 
|Dan Katzman(3)                |                   |                 
|Public Float                  |                   |                 

---

|(1) | Kibbutz
Shamir holds shares in our company through Shamir Optica Holdings A.C.S.
               Ltd. The management board of Kibbutz Shamir manages the economic
activities and                strategy of Kibbutz Shamir and makes the voting and
investment decisions of                Kibbutz Shamir (by majority vote) with regard to
our shares. The management                board of Kibbutz Shamir has 16 members. Giora
Ben-Zeev, Efrat Cohen, Dagan                Avishai, Rami Ben-Zeev and Uzi Tzur are
directors or officers of our company and                also members of the management
board of Kibbutz Shamir, and our shares held by                Kibbutz Shamir may be
attributed to them. The other members of the management                board of Kibbutz
Shamir are Edy Kudlash, Nili Van Der Meer, Yitzchak Cahana,                Avraham Hadar,
Zeev Markman, Ilan Pickman, Pinchas Carmi, Yossi Michaeli, Yaakov                Gotlib,
Maya Segal and Omry Rotem.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|(2) | The
voting and investment decisions for FIBI Investment House are made by the
               chief executive officer of FIBI Investment House. The chief executive
officer                may also request the approval of the board of FIBI Investment
House with regard                to unusually important votes. In case of a disposition
of all or substantially                all of our shares by FIBI Investment House, a
decision regarding this                disposition will be taken by the board of
directors of FIBI Holdings Ltd., the                parent company of FIBI Investment
House. The chief executive officer of FIBI                Investment House is Guy Vaadia.
The members of the board of directors of FIBI                Investment House are Zadik
Bino, Gil Bino and Garry Stock. The members of the                board of directors of
FIBI Holdings Ltd. are Zadik Bino, Gil Bino, Garry Stock,                Harry (Hersh)
Cooper, Yossef Alchech, Gabriel Roter, Nilli Even-Chen, Mordechai                Ben
Shach and Gabi Barabash.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Consists
entirely of currently exercisable options to acquire our shares. The
               percentages of shares held by Dan Katzman are based on the number of our
shares                outstanding at the relevant time, partially diluted to include the
number of                shares corresponding to the options held by Dan Katzman.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

FIBI
Investment House Ltd. is an affiliate of a broker-dealer. FIBI Investment House Ltd. has
represented to us that it purchased the shares being registered for resale in the ordinary
course of business and that, at the time of the purchase, it had no agreements or
understandings, directly or indirectly, with any person to distribute the securities.

# 7.B RELATED PARTY
TRANSACTIONS

We
have, from time to time, entered into agreements with our shareholders and affiliates. We
describe these relationships and related party transactions below.

Relationship with Kibbutz
Shamir

Our
majority shareholder is Kibbutz Shamir, a small communal society with approximately 270
members and 600 total residents located in upper Galilee, in northern Israel. Established
in 1944, Kibbutz Shamir is a largely self-governed community of members who share certain
social ideals and professional interests and who live in a distinct geographic area, which
they own and develop on a communal basis. Initially, the social idea behind the formation
of the kibbutzim in Israel was to create a communal society in which all members share
equally in all of the societys resources and which provides for the needs of the
community. Over the years, the structure of the kibbutzim has evolved, and today there are
a number of different economic and social arrangements adopted by various kibbutzim.
Kibbutz Shamir has moved toward more private ownership and voluntary participation in
communal activities, although each member continues to own an equal part of the assets of
Kibbutz Shamir. The members of Kibbutz Shamir are engaged in a number of economic
activities, from farming to research and development of progressive spectacle lenses. In
addition to being our majority shareholder, Kibbutz Shamir also owns two other companies
that, like us, are located on the grounds of Kibbutz Shamir: Shalag Industries, Ltd. and
N.R. Spuntech Industries, Ltd., both of which are engaged in the manufacture and sale of
non-woven cloth and are listed on the Tel Aviv Stock Exchange. The kibbutz community holds
in common all land, buildings and production assets of these companies.

Most
of the members of Kibbutz Shamir work in one of the production activities of Kibbutz
Shamir, according to the requirements of Kibbutz Shamir and the career objectives of the
individual concerned. Some other members work outside of Kibbutz Shamir in businesses
owned by other entities. Each member receives an income based on the position the member
holds and his or her economic contribution to the community, as well as on the size and
composition of his or her family. Each members income depends on the income of
Kibbutz Shamir from its economic activities. Each member has a personal pension fund that
is funded by Kibbutz Shamir, and all accommodation, educational, health and old age care
services, as well as social and municipal services, are provided either by or through
Kibbutz Shamir and are subsidized by Kibbutz Shamir.

The
economic activities and strategy of Kibbutz Shamir are managed by an elected management
board. This board is the key economic decision-making body of Kibbutz Shamir. Its members
are elected by the members of the council of Kibbutz Shamir for terms of three years. The
chairman of the management board is elected for a term of four years directly by the
members of Kibbutz Shamir. Kibbutz Shamirs council is elected annually by the
Kibbutz Shamir members. The council may remove a member of the management board by simple
majority vote. The boards of directors of Kibbutz Shamirs companies operate
independently from the management board of Kibbutz Shamir itself. One of the members of
our companys board of directors, Uzi Tzur, is also the chairman of the management
board of Kibbutz Shamir and a member of Kibbutz Shamir. Our board member and chief
executive officer, Giora Ben-Zeev, and two of our companys executive officers, Dagan
Avishai and Rami Ben Zeev, are also members Kibbutz Shamir and of the management board of
Kibbutz Shamir. Another one of our directors, Efrat Cohen, is a member of the management
board of Kibbutz Shamir but not a member of Kibbutz Shamir itself. About 37 members of our
342 person workforce in Israel are also members of Kibbutz Shamir. Our headquarters and
main production facilities, which we lease from Kibbutz Shamir, are located on the
premises of Kibbutz Shamir, and we have entered into several professional agreements with
Kibbutz Shamir that are described below. While these agreements have been negotiated on an
arms length basis, they may contain terms that are different from the terms that
would have been included had these agreements been negotiated with unaffiliated third
parties.

47

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Working Services
Agreement with Kibbutz Shamir

On
February 9, 2005 we entered into a new working services agreement with Kibbutz Shamir. The
new agreement became effective immediately upon the listing of our securities for trading
on a U.S. stock exchange. With the effectiveness of the new agreement, the prior working
services agreement of January 5, 1999 terminated.

Under
the new agreement, Kibbutz Shamir undertakes on a best efforts basis (but is not strictly
obligated) to provide us with individuals to fill the relevant positions for which we
request staffing. In addition, we are obligated to grant Kibbutz Shamir a first
opportunity to provide such individuals for any positions for which we seek staffing.
Those kibbutz members who are already filling positions with the company will continue
their service under the new agreement, with the exception of our chief executive officer,
Giora Ben-Zeev, and our executive vice president, Dagan Avishai, who will be paid directly
and are no longer part of the working services agreement. Subject to the above, we are
entitled to determine, with respect to all kibbutz members who provide services to us, the
type of position to be filled by kibbutz members, the number of positions, the scope of
each position, as well as, with respect to new workers provided by Kibbutz Shamir, the
fees to be paid in consideration for the members services. The fees to be paid by us
to Kibbutz Shamir are linked to the Israeli Consumer Price Index published by the Israeli
Central Bureau of Statistics. The fees are increased or decreased by the same percentage
as the price index increases or decreases in each month and are paid at the beginning of
each month in accordance with the actual positions supplied to us during the preceding
month. We believe that, except for the salaries of our chief executive officer and our
executive vice president, which are paid directly and not as part of the working services
agreement, the fees to be paid under the new agreement will for the foreseeable future be
substantially similar to the amounts we have paid under the prior agreement, to the extent
that Kibbutz Shamir provides us with substantially the same number of workers for
substantially the same positions. As with the prior working services agreement, we may,
for reasonable cause, refuse to accept workers referred to us by Kibbutz Shamir or demand
the replacement of existing workers.

We
have agreed not to employ any kibbutz member directly, with the exception of the chief
executive officer and the executive vice president. The agreement specifies that Kibbutz
Shamir will indemnify us for any liabilities that might arise under an imputed
employer-employee relationship between us and the members of Kibbutz Shamir who provide
the services. The agreement includes a non-disclosure undertaking by Kibbutz Shamir on its
own behalf and on behalf of Kibbutz Shamir members through whom services are provided to
us.

The
initial term of the agreement is 60 months from the listing of our securities for trading
on a U.S. stock exchange, with subsequent automatic extensions for additional periods of
five years, unless one party notifies the other, in writing, at least 180 days before the
end of the then current effective period.

In
2005 we paid a total of approximately $1.3 million to Kibbutz Shamir under the working
services agreement.

In
addition, from time to time we pay bonuses to our employees. These bonuses are not
governed by the working services agreement. Employees who are members of the kibbutz
receive these bonuses on the same terms as non-member employees.

Service Agreement with
Kibbutz Shamir

We
entered into a service agreement with Kibbutz Shamir on January 1, 1999, pursuant to which
Kibbutz Shamir provides us with catering, security, laundry, switchboard and
communications, maintenance and landscaping, and trash removal services. In return, we pay
Kibbutz Shamir a monthly service fee, which also includes our municipality tax. The fee is
linked to the consumer price index.

On
February 9, 2005 we entered into a new service agreement with Kibbutz Shamir, which became
effective upon the listing of our securities for trading on a U.S. stock exchange. With
effectiveness of the new agreement, the old service agreement of January 1, 1999 was
terminated.

The
services to be provided by Kibbutz Shamir pursuant to the new service agreement include
the same services as under the earlier agreement, as described above, with the exception
of security services. In addition, internet access is provided under the new agreement.

The
fee for these services, including the new services, remains the same as in the prior
agreement and is initially fixed at NIS 92,000 per month. Fees for water usage are
calculated separately. The fee is linked to the consumer price index and reviewed every 5
years. In the event that the cost to Kibbutz Shamir of providing these services increased
or decreased during the final year of the agreements term as compared to the date of
effectiveness, the service fee shall be adjusted accordingly. If the costs increase or
decrease by 30% or more in any particular year during the term of the agreement, the
service fee will be adjusted for the following year. If Kibbutz Shamir provides additional
services to us, the fee shall be adjusted accordingly. The fee for catering services is
adjusted continuously based on the actual number of employees using these services. We
believe that, to the extent Kibbutz Shamir continues to provide substantially the same
services to us for substantially the same number of employees, the fees to be paid under
the new agreement will for the foreseeable future be substantially similar to the amounts
we have paid under the prior agreement.

48

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The
agreement specifies that Kibbutz Shamir will indemnify us for any liabilities that might
arise under an imputed employer-employee relationship between us and the members of
Kibbutz Shamir who provide the services.

The
other operative terms of the new agreement remain unchanged from the prior agreement.

The initial
term of the agreement is 60 months from the listing of our securities for trading on a
U.S. stock exchange, with automatic renewal for periods of five years, unless terminated
earlier by either party upon 12 months written notice.

In
2005 we paid a total of approximately $0.24 million to Kibbutz Shamir under the service
agreement.

Lease and Sublease
Agreements with Kibbutz Shamir

Our
principal offices, manufacturing and research and development facilities are located on
the grounds of Kibbutz Shamir and include a building of approximately 4,700 square meters,
and a yard of approximately 1,800 square meters (the Facilities). The
Facilities are subleased from Kibbutz Shamir, which has a long-term lease on the property
from the Israel Lands Administration (the ILA).

The
lease agreement between Kibbutz Shamir and the ILA was signed on December 27, 1990 for a
term of 49 years, with an option to extend for an additional 49 years. Pursuant to the
lease, Kibbutz Shamir may use the lands for agricultural and residential purposes and
services to members of Kibbutz Shamir and for commercial purposes, including the
Companys factory.

The
ILA may cancel the lease in certain circumstances, including if Kibbutz Shamir commences
proceedings to disband or liquidate or in the event that Kibbutz Shamir ceases to be a
kibbutz as defined in the lease (i.e., a registered cooperative society
classified as a kibbutz).

Pursuant
to the lease, Kibbutz Shamir may, with permission from the ILA and without additional
fees, sublease the parcel to a corporation under its control.

On
January 5, 1999 we and Kibbutz Shamir signed a sublease agreement pursuant to which
Kibbutz Shamir subleased to us the Facilities for a period of twenty years beginning on
January 1, 1999. Annual rental payments are $1 for each square meter of yard and $4 for
each square meter of building. At that time, the Facilities included a building of
approximately 3,238 square meters and a yard of approximately 2,740 square meters. Kibbutz
Shamir constructed an additional 1,462 square meters of an extension to our headquarters
and manufacturing building at its own expense, for which we pay rent of $6 per square
meter.

The
rent is paid every six months in advance. Every two years, the rent will be adjusted in
accordance with market rental prices for similar properties.

The
agreement also states that any construction or changes in the building located on the
property are subject to Kibbutz Shamirs prior consent and all such construction will
belong to Kibbutz Shamir. Kibbutz Shamir has the right of first refusal to carry out any
construction work for us with respect to the subleased property. Kibbutz Shamir may demand
that we finance the cost of the construction, and we are entitled to set off construction
costs related only to buildings against our rental payments. Any additional internal
construction work will be at our expense and is not subject to this offsetting. In the
event of a disagreement between the parties with respect to the cost of construction, the
cost shall be determined by a licensed appraiser.

In
the event of additional construction, the rental fee for the property is increased to $6
for each additional square meter of building. We have insured the Facilities and added
Kibbutz Shamir as a beneficiary in the insurance policy.

The
sublease will be terminated in the event that Kibbutz Shamir holds, directly or
indirectly, less than 50% of our share capital, unless the ILA agrees otherwise. We are
entitled to terminate the sublease agreement by a prior written notice of 36 months.

On
February 9, 2005 we entered into an amendment to the sublease agreement with Kibbutz
Shamir governing the facilities we use that are located on the premises of Kibbutz Shamir.
The amendment became effective upon the listing of our securities for trading on a U.S.
stock exchange. Except as noted below, the operative terms of the new agreement remain
unchanged from the prior agreement.

49

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The
term of the amended agreement is extended from 20 years to 24 years and 11 months. The
base rent will be updated every five years rather than two years, to a level comparable to
that of similar property in the area. We will continue to be entitled to provide Kibbutz
Shamir with a 36-month written termination notice after 10 years of lease.

Rental
payments under the amended agreement are the same as under the prior agreement, except
that the amended agreement specifies that any additional construction of industrial
facilities will be charged a rent of $4 per square meter, while additional construction of
the new offices will be charged $6 per square meter. The rent for any other additional
construction will be negotiated in good faith. In addition, the rent for a specific
production area identified in the agreement is reduced from $6 to $4 per square meter.

Except
for these changes, we believe that the payments to be made under the amended agreement
will for the foreseeable future be substantially similar to the amounts we have paid
under the prior agreement. In 2005 we paid a total of approximately $.29 million to
Kibbutz Shamir under the sublease agreement.

If
the agreement is terminated for any reason other than a breach by Kibbutz Shamir, Kibbutz
Shamir shall not be obligated to repay any loans that we have provided for construction
unless the newly constructed parts of the building are occupied by a third party or used
by Kibbutz Shamir.

The
ILA may, from time to time, change its regulations governing the lease agreement, and
these changes could affect the terms of the sublease agreement, as amended, including the
provisions governing its termination.

At
our Extraordinary General Meeting of August 8, 2005, our shareholders approved the entry
of Shamir and/or a subsidiary of Shamir (the Lessee) into a lease agreement
with Kibbutz Shamir. Pursuant to the lease agreement the Lessee will lease a building on
the Kibbutzs territory from the Kibbutz for a period commencing upon the completion
of the construction of this building and ending not later than the lapse of 24 years and
11 months thereafter. The building will be used for Shamirs production operations
and will have a total area of approximately 17,000 square meters. The rental fees, in the
amount of approximately $34,200 per month, will be payable semi-annually. As of June 15,
2006, the construction of the building had not been completed. In addition, on June 4,
2006, we signed a memorandum of understanding with Shalag Industries Ltd., pursuant to
which we rent 120 square meters for our subsidiary, Shamir Special Optical Products Ltd.
This memorandum of understanding provides for the same rental amounts as the sublease
agreement with Kibbutz Shamir, as described above.

Loan Agreements with
Kibbutz Shamir

In
accordance with our sublease agreement with Kibbutz Shamir dated January 5, 1999 (as
amended on February 9, 2005), we granted a loan of $370,000 to Kibbutz Shamir in several
installments in 2004 in order to fund the construction of an extension to our premises in
Kibbutz Shamir. The loan is to be repaid in equal quarterly installments over a period of
four years commencing March 31, 2005, through deductions of the rental fees we pay to
Kibbutz Shamir. The loan bears interest at 1.5% per year.

At
our Extraordinary General Meeting of August 8, 2005, our shareholders approved a loan to
Kibbutz Shamir in an amount not greater than $4.4 million (the Loan), which
will bear annual interest at a variable rate equal to annual LIBOR plus 1.5%. An agreement
in connection with the Loan has yet to be signed. The Loan will provide the Kibbutz with
funds for the construction of a building on the Kibbutzs territory, as described
above. The principal amount and interest on the Loan will be repaid in semi-annual
installments in an amount equal to the semi-annual rental fees to be paid by the Company
to the Kibbutz pursuant to a lease agreement. The Loan will be unsecured, but Shamir will
be entitled to set-off amounts due and payable by the Kibbutz to Shamir under the Loan
against the rental fees due and payable by Shamir to the Kibbutz under the lease agreement

Investment Agreement with
F.I.B.I. Investment House Ltd

On
January 5, 1999 we signed an agreement, which was amended in April 1999, with Kibbutz
Shamir and F.I.B.I. Investment House Ltd. (FIBI), an Israeli investment
company, pursuant to which FIBI acquired 15 percent of our issued and outstanding share
capital (in case we are converted into a limited liability company and for purposes of
dividend distributions) in consideration for $4.14 million.

The
agreement lists a number of issues for which the unanimous consent of all of our members
is required, including accepting any new member to the agricultural cooperative society,
amending the Articles of Association and terminating or winding up our business.

Pursuant
to the agreement, we were required to distribute a yearly dividend of at least 35% of our
distributable profits to our members. Following our conversion into a limited liability
company, the board of the company is entitled to determine the timing and amounts of
dividend distributions.

50

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Under
the agreement any sale of shares by one of our members is subject to a right of first
refusal granted to the other members. In addition, each of our members is entitled to
appoint one director to our board of directors and the other members will vote for each of
these appointments at the relevant shareholder meeting.

We
agreed to pay FIBI fees in the amount of NIS 33,000 per month, plus V.A.T., beginning
January 14, 1999 and until the earlier of (i) the lapse of 24 months or (ii) an IPO, for
tax consulting services provided to us by FIBI through Mr. Zeev Feldman. This original
term was extended, and accordingly, we paid FIBI $90,000, $84,000 and $73,000 for the
years 2001, 2002, 2003, respectively. We did not pay FIBI any fees in 2004 or in 2005.

With
the listing of our securities for trading on a U.S. stock exchange, this investment
agreement terminated and was replaced by a new shareholders agreement, as described
below.

Registration Rights
Agreement

Prior
to the initial public offering of our shares in March 2005, we entered into a registration
rights agreement with our then shareholders. See Item 10. Additional Information
 Shares Eligible for Future Sale  Registration Rights Agreement.

# Relationship with
Kibbutz Eyal

Kibbutz
Eyal held 3.95% of our shares prior to the March 2005 offering.(2) We acquired
our wholly-owned manufacturing subsidiary, Eyal Optical Industries (1995) Ltd.
(Eyal), from Kibbutz Eyal in a series of transactions between 1997 and 2003.
Eyal is located on the premises of Kibbutz Eyal pursuant to a lease agreement between Eyal
and Kibbutz Eyal.

In
December 2003 we granted Kibbutz Eyal a call option exercisable until January 10, 2004 to
purchase 502,400 of our shares in consideration for an exercise price of $2.0 million.
Kibbutz Eyal exercised the call option on January 4, 2004. We also granted Kibbutz Eyal a
put option to sell the shares subject to the call option to us in consideration for $3.0
million. The put option was exercisable between January 1, 2006 and January 10, 2010. It
expired upon the reorganization of our company from an A.C.S. into an Israeli limited
liability company.

As
long as Kibbutz Eyal holds at least 3% of our shares, it has the right to appoint a member
of our board of directors, as well as a tag-along right to join a sale of our shares by
Kibbutz Shamir in certain circumstances. Kibbutz Eyal has waived its right to appoint a
member of our board of directors, effective as of the closing of the March 2005 offering.
Kibbutz Eyal currently holds approximately 2.79% of our shares.

Kibbutz
Eyal has the right to appoint one member of the board of directors of Eyal for as long as
it is entitled to appoint a board member to our board of directors, and longer in certain
circumstances.

# Relationship with
Altras Former Chief Executive Officer

In
the fourth quarter of 2001, we acquired 100% of the shares of Altra Trading GmbH. Shortly
thereafter, we transferred 6% of Altras shares to Altras chief executive
officer at that time, Michael Oppenheimer. In 2002 we sold an additional 43% of
Altras shares to Mr. Oppenheimer. In the context of this purchase, we entered into a
shareholder agreement with Mr. Oppenheimer pursuant to which Mr. Oppenheimers
consent is required for certain resolutions or transactions, including any shareholder
resolution that contradicts any of the existing commercial agreements between Altra, Eyal
Optical Industry (1995) Ltd. and us; issuances of shares or securities, except at an
agreed-upon company valuation; any transaction between Altra and a related party or any
other transaction outside the ordinary course of business, and the distribution of any
dividends that exceed 50% of Altras net profit. Mr. Oppenheimer has a put option
exercisable for seven years beginning December 31, 2004, to sell 15% of the shares he
holds in Altra to us per year, at a price based on the fair value of the net assets of
Altra at the time of sale. We have a right of first refusal to purchase any shares in
Altra not held by us, and Mr. Oppenheimer has a tag-along right to participate in any sale
of shares for as long as he holds more than 5% of Altras shares, as well as a
drag-along obligation to sell his Altra shares if we receive an offer from a third party
to purchase 100% of Altras shares.

# 7.C INTERESTS OF EXPERTS
AND COUNSEL

Not
applicable.

---

|2 | Kibbutz
Eyal holds our shares through Haklaei Hasharon A.C.S. Ltd., a company
               owned by Kibbutz Eyal. The options and agreements discussed in this
sub-section                have been granted to or entered into with Haklaei Hasharon
A.C.S. Ltd.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

51

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# ITEM 8. FINANCIAL
INFORMATION

# 8.A CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION

See
Item 18 for a list of financial statements filed as part of this annual report.

# Export Sales

In
2005 substantially all of our Molds and semi-finished lenses were produced in Israel.
Production of finished lenses took place outside of Israel and we generated almost all of
our revenue outside of Israel.

# Legal Proceedings

From
time to time, we and our subsidiaries may be involved in lawsuits, claims, investigations
or other legal or arbitral proceedings that arise in the ordinary course of our business.
These proceedings may include general commercial disputes and claims regarding
intellectual property. We are involved in two disputes concerning allegations of breach of
third parties patents, as described below.

In
November 2003 one of our laboratory customers in the United States was notified by a large
lens manufacturer that the manufacturer believes that the sales of a certain lens
constitutes an infringement of a certain patent of this manufacturer. We have denied any
such infringement allegations and have entered into negotiations with the manufacturer
with regard to this patent in order to reach a resolution.

In
September 2003 we received a separate and on its face unrelated notification from a
different large lens manufacturer in which the manufacturer claimed that the lenses
produced using our Prescriptor software infringe upon a U.S. patent held by the
manufacturer. In subsequent correspondence, the manufacturer stated that it believed only
one claim of the patent to be infringed. We have denied any such infringement. We have
entered into discussions with this manufacturer and have asked for clarification of his
claims.

In
addition, on June 8, 2006, BMC Industries, Inc. (Vision Ease) filed a complaint in order
to avoid and recover preferential transfers due to Shamir USA, which was required to
respond to this complaint within 30 days. The payment amount in question that was received
during the Preferential Period (March 25, 2004 through June 22, 2004) is
approximately estimated $0.347 million.

We
currently cannot predict the development or ultimate outcome of the discussions with
regard to these claims

# Dividend Policy

We
have historically paid dividends from our annual profits. We were a party to an investment
agreement with one of our shareholders that required us to pay dividends. In the fiscal
years 2001 through 2005, we paid dividends of $2.8 million, $4.0 million, $4.3 million,
$6.6 million and $5.2 million, respectively.

In
August 2004 we declared a special dividend totaling $9.2 million in order to take
advantage of certain tax benefits for our shareholders. We paid $4.0 million of this
dividend on December 1, 2004, and 5.2 million during the year 2005. We may decide not to
maintain the level of dividend payments made during prior years following the completion
of the March 2005 offering, or not to make any dividend payments at all. Any future
decisions regarding the distribution of dividends will depend on our net income, our
investment policy and our dividend policy at that time.

# 8.B SIGNIFICANT CHANGES

See
Note 17 to our consolidated financial statements included elsewhere in this annual report.

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# ITEM 9. THE LISTING

# 9.A LISTING DETAILS

The
table below shows the monthly high and low sales prices of our common shares on the NASDAQ
National Market, as of the end of each fiscal quarter indicated below and for each month
of the six month period from December 1, 2005 to May 30, 2006.

|2005                           | High | Low | Average Daily Trading Volume
|------------------------------ | ---- | --- | ----------------------------
|
|
|
|
|Third Quarter                  |      |     | $                           
|Fourth Quarter                 |      |     | $                           
|                               |      |    
|2006                          
|First Quarter                  |      |     | $                           
|Second Quarter (until June 15) |      |     | $                           

|Month         | High | Low | Average Daily Trading Volume
|------------- | ---- | --- | ----------------------------
|
|
|
|
|December 2005 |      |     | $                           
|January 2006  |      |     | $                           
|February 2006 |      |     | $                           
|March 2006    |      |     | $                           
|April 2006    |      |     | $                           
|May 2006      |      |     | $                           

The
table below shows the high and low sales prices of our common shares on the Tel Aviv
Stock Exchange as of the end of each fiscal quarter indicated below and for each month of
the six month period from December 1, 2005 to May 30, 2006.

|2005           | High | Low | Average Daily Trading Volume
|-------------- | ---- | --- | ----------------------------
|
|
|
|
|Third Quarter  |      |     | NIS 76.42                   
|Fourth Quarter |      |     | NIS 52.53                   

|2006                           |  |  |          
|------------------------------ |  |  | ---------
|
|
|
|
|First Quarter                  |  |  | NIS 54.00
|Second Quarter (until June 15) |  |  | NIS 49.11

|Month         | High | Low | Average Daily Trading Volume
|------------- | ---- | --- | ----------------------------
|
|
|
|
|December 2005 |      |     | NIS 52.53                   
|January 2006  |      |     | NIS 54.00                   
|February 2006 |      |     | NIS 51.11                   
|March 2006    |      |     | NIS 47.27                   
|April 2006    |      |     | NIS 49.11                   
|May 2006      |      |     | NIS 48.12                   

# 9.B PLAN OF DISTRIBUTION

Not
applicable.

# 9.C MARKETS

Our
common shares have been listed on the NASDAQ National Market since March 11, 2005, under
the symbol "SHMR".  Our common shares have also been listed on the Tel Aviv Stock
Exchange since May 2, 2005. The address of the website of the Tel Aviv Stock Exchange is
www.tase.co.il.

# 9.D SELLING SHAREHOLDERS

Not applicable.

53

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# 9.E DILUTION

Not applicable.

# 9.F EXPENSES OF THE ISSUE

Not applicable.

# ITEM 10. ADDITIONAL
INFORMATION

# 10.A SHARE CAPITAL

Not applicable

# 10.B MEMORANDUM AND ARTICLES
OF ASSOCIATION

Our
registration number with the Israeli registrar of companies is 51-365956-5.

The purpose
of the Company is to engage, directly or indirectly, in any lawful business activity or
occupation whatsoever; provided, however, that the Company may donate reasonable amounts
to worthy causes, as the Board may determine in its discretion, even if such donations are
not within the framework of business considerations. See Article 3 of our Articles of
Association, which sets forth our purposes.

The
following sections, to the extent they refer to our Articles of Association are qualified
in their entirety by the articles themselves, filed as an exhibit to our Registration
Statement on Form F-1.

For
a summary of the provisions of our Articles of Association and bylaws with respect to the
Board of Directors, see Item 6, "Directors Senior Management and Employees - Board of
Directors".

# Transfer of Shares and
Notices

Our
fully paid common shares are issued in registered form and are freely transferable under
our Articles of Association. Under the Companies Law and our Articles of Association,
shareholders' meetings require prior notice of at least 21 days.

# Anti-Takeover
Provisions; Mergers and Acquisitions under Israeli Law

The
Israeli Companies Law regulates mergers where the target company is dissolved into the
acquiring company and allows such a merger to be effected if the merger receives the
approval of the boards of directors of each of the merging companies and a majority of
the shareholders present and voting at the general shareholders meeting of each of
the merging companies, or by a majority of 75% of the shareholders present and voting on
the proposed merger in case a company was incorporated under the Israeli Companies
Ordinance. However, an approval of the general shareholders meeting of any of the
following is not required: (a) in a target company wholly owned and controlled by the
acquiring company; (b) in the acquiring company provided all of the following conditions
are fulfilled: (i) the acquiring company is not required as a result of the merger to
amend its articles and memorandum of association; and (ii) the acquiring company will not
issue, as part of the merger, more than 20% of the voting rights in the acquiring
company, and as a result of the issuance no shareholder becomes a holder of a controlling
party as defined in the Companies Law. In addition to the approval of the merger by the
requisite majority at the shareholdersgeneral meeting, in case the other party to
the merger or a person holding 25% or more of the shares of the other party to the
merger, then the majority must include a majority of the shares held by those
shareholders participating in the vote (abstaining votes shall not be taken into account)
who do not have an interest in the other party. Upon petition by a creditor of a merging
company, the court may delay or prevent the consummation of the merger, if it deems there
to be a reasonable concern that as a result of the merger, the surviving company will not
be able to meet the obligation to creditors of either of the merging companies. A merger
may not be completed until 30 days have passed from the time that the general shareholders meetings
of each of the merging companies have approved the merger and 50 days have passed from
the time that the merger proposal has been filed with the Israeli Registrar of Companies,
including all approvals necessary for its completion.

54

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The
Israeli Companies Law also provides that an acquisition of shares in a public company
such as us must be made by means of a tender offer if, as a result of the acquisition,
the purchaser would become a 25% shareholder of the company. This rule does not apply if
there is already another 25% shareholder of the company. Similarly, the Israeli Companies
Law provides that an acquisition of shares in a public company must be made by means of a
tender offer if as a result of the acquisition the purchaser would become more than a 45%
shareholder of the company, unless there is already a shareholder holding more than 45%
of the voting rights of the company. These rules do not apply if: (a) the acquisition is
made by way of a private issue, provided that the acquisition was approved by the general
shareholders meeting as a private issue which will grant the offeree 25% or more of
the shares of the company, if there is not a person holding 25% or more of the shares of
the company, or as a private issue which will grant the offeree 45% of the voting rights
of the company, provided there is no person holding 45% of the voting rights in the
company; (b) the acquisition is from a person holding more than 25% of the voting rights
in the company, and as a result of the acquisition the purchaser will hold 25% or more of
the voting rights in the company; (c) the acquisition is from a person holding more than
45% of the voting rights of the company, and as a result of the acquisition the purchaser
will hold more than 45% of the voting rights of the company. In order to be accepted, the
special tender offer must be accepted by a majority of the offerees and result in the
acquisition of no less than 5% of the voting rights in the company. These restrictions do
not apply if according to the laws of the country where the securities are registered for
trading there are restrictions in respect of an acquisition of certain control rights or
the acquisition of certain control rights obligates the purchaser to also make a tender
offer to the public.

An
acquisition of shares following which the purchaser would become a holder of more than
90% of a public companys shares must be made by a tender offer for the purchase of
all the remaining shares (a full tender offer); if a full tender offer is accepted by
holders to the extent that non-accepting holders hold less than 5% of the companys
issued shares, then the holders of the remaining shares must sell their shares to the
acquirer on the terms of the tender offer. However, if the acquirer is unsuccessful in
completing a full tender offer, the acquirer will not be permitted to acquire tendered
shares to the extent that the acquisition of those shares would bring the acquirers
holdings to more than 90% of the target companys shares. Offerees of a successful
full tender offer may petition the courts to raise the purchase price on the basis that
it is an unfairprice.

In
addition, a shareholder who holds more than 90% of the shares of a public company may not
purchase additional shares as long as the shareholder holds more than 90%. Shares
acquired in violation of these provisions become dormant and cease to confer any rights
upon their holder as long as they are held by the acquirer.

# Dividend and Liquidation
Rights

Our
board of directors may, without seeking shareholder approval, declare a dividend to be
paid to the holders of common shares out of our retained earnings or our earnings derived
over the two most recent years, whichever is higher, as reflected in the last audited or
reviewed financial report for a period ending less than six months prior to distribution
(the Profit Requirement), provided that there is no reasonable concern that a
payment of a dividend will prevent us from satisfying our existing and foreseeable
obligations as they become due. If we do not meet the Profit Requirement, a court may
allow us to distribute a dividend, as long as the court is convinced that there is no
reasonable concern that a distribution might prevent us from being able to meet our
existing and anticipated obligations as they become due. Dividends are distributed to
shareholders in proportion to the nominal value of their respective holdings.

In
the event of our liquidation, after satisfaction of liabilities to creditors, our assets
will be distributed to the holders of common shares in proportion to the nominal value of
their respective holdings. This right may be affected by the grant of preferential
dividend or distribution rights to the holders of any class of shares with preferential
rights that may be authorized in the future. Our shareholders would need to approve any
class of shares with preferential rights.

# Tax Law

Israeli
tax law treats some acquisitions, particularly stock-for-stock swaps between an Israeli
company and a foreign company, less favorably than U.S. tax law. Israeli tax law may, for
example, subject a shareholder who exchanges our shares for shares in a foreign
corporation to immediate Israeli taxation. See "- Israeli Taxation."

# Modification of Class
Rights

Unless
otherwise provided by the Articles of Association, an amendment to the Articles of
Association that prejudices the rights of a particular class of shares may be adopted by
a resolution of the holders of a 75% majority of the shares of that class present at a
separate class meeting, in addition to the approval of the general meeting of all classes
of shares.

# Election of Directors

Our
common shares do not have cumulative voting rights in the election of directors.
Therefore, the holders of common 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: (i) the majority of shares voting for
the election includes at least one-third of the shares of non-controlling shareholders
participating in the vote (abstaining votes shall not be taken into account); or (ii) the
total number of shares of non-controlling shareholders voting against the election of the
external director does not exceed one percent of the aggregate voting rights in the
company.

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# Voting,
Shareholders Meetings and Resolutions

Holders
of common shares have one vote for each common share held on all matters submitted to a
vote of the shareholders. These voting rights may be affected by the grant of special
voting rights to the holders of any class of shares with preferential rights that may be
authorized in the future; however, currently no holders of our shares have any special
voting rights.

An
annual meeting of the shareholders must be held every year, and not later than 15 months
following the last annual meeting. A special meeting of the shareholders may be convened
by the board of directors at its discretion or upon the demand of any of: (1) two of the
directors or 25% of the then serving directors, whichever is fewer; (2) shareholders
owning at least 10% of the issued share capital and at least 1% of the voting rights in
the company; or (3) shareholders owning at least 10% of the voting rights in the company.
If the board does not convene a meeting upon a valid demand of any of the above, then
whoever made the demand, and in the case of shareholders, those shareholders holding more
than half of the voting rights of the persons making the demand, may convene a meeting of
the shareholders to be held within three months of the demand. Alternatively, upon
petition by the individuals making the demand, a court may order that a meeting be
convened.

The
quorum required for any general meeting of shareholders consists of at least two
shareholders present in person or by proxy who hold or represent between them at least 331/3%
of the voting rights. 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 to a later date
specified in the summons or notice of the meeting. At the reconvened meeting, the
required quorum consists of any number of shareholders present. In any shareholders meeting,
a shareholder can vote either in person or by proxy. General meetings of shareholders
will be held in Israel, unless decided otherwise by our board.

Under
Israeli law, unless otherwise provided in the Articles of Association or applicable law,
all resolutions of the shareholders require a simple majority. Under our Articles of
Association, resolutions requiring special voting procedures include any amendments of a
provision in our Articles of Association, which requires the approval of the holders of
75% of the voting rights represented at the meeting and voting on the resolution.

Under
the Israeli Companies Law, a shareholder has a duty to act in good faith and in a
customary manner in exercising his rights and duties towards the company and other
shareholders, to refrain from prejudicing the rights of other shareholders and to refrain
from abusing his power in the company. The rights and duties apply, among other things,
to voting at the general meeting of the shareholders on any of the following matters: (1)
amendments to the Articles of Association, (2) increasing our registered share capital,
(3) a merger, or (4) an approval of those related party transactions that require
shareholder approval.

In
addition, shareholders who are one of the following are under a duty to act fairly toward
the company: (1) a controlling shareholder; (2) a shareholder who knows that its vote
will determine the outcome of a shareholder vote; or (3) a shareholder who, under the
provisions of the articles, has the power to appoint or to prevent the appointment of an
office holder in the company or holds other powers with respect to the company.

# Transfer Agent and
Registrar

We
have appointed American Stock Transfer & Trust Company as the transfer agent and
registrar for our common shares.

# Israeli Securities Law
Requirements

According
to the Israeli Securities Law, the publication of this annual report does not require the
approval of the Israeli Securities Authority.

# Listing

Our
common shares are listed on the NASDAQ National Market under the symbol "SHMR" and on the
Tel Aviv Stock Exchange.

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# Shares Eligible for
Future Sale

Prior
to the March 2005 initial public offering of our common shares, there was no public
market in the United States or elsewhere for our shares. We cannot predict the effect, if
any, that market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. As we describe below, only a limited number of
shares was available for sale shortly after the March 2005 offering due to contractual
and legal restrictions on resale. Nevertheless, sales of our common shares in the public
market after the restrictions lapse, or the perception that those sales may occur, could
cause the prevailing market price to decrease or to be lower than it might be in the
absence of those sales or perceptions.

# Sale of Restricted Shares

We
currently have 16,256,514 common shares outstanding. The 4,600,000 common shares sold in
the March 10, 2005 offering are freely tradable without restriction or further
registration under the Securities Act. However, if shares are purchased by affiliates, as
that term is defined in Rule 144 under the Securities Act, their sales of common shares
would be subject to volume limitations and other restrictions that are described below.

Other
than the shares sold in the March 10, 2005 offering, our remaining common shares
outstanding are restricted securities. We issued and sold these shares in
reliance on exemptions from the registration requirements of the Securities Act or in
transactions outside of the United States and not subject to the Securities Act.
Restricted securities may be sold in the public market only if they are registered under
the Securities Act, or if they qualify for an exemption from registration under Rule 144
or Rule 701. In addition, restricted securities may be sold outside the United States by
our non-U.S. shareholders and employees pursuant to Regulation S under the Securities
Act.

Our
common shares outstanding are eligible for sale into the public market as follows:

|Approximate Number of Shares | Description
|---------------------------- | -----------

|4,600,000 | Freely
tradableshares sold in the March 2005 offering.
|--------- | ------------------------------------------------------

|11,952,742 | These
common shares are saleable under Rule 144, subject to holding periods and volume
limitations.
|---------- | ---------------------------------------------------------------------------------------------------

10.C MATERIAL CONTRACTS

For
a description of material contracts other than the one described below, see Item 7
Major Shareholders and Related Party TransactionsRelated Party
Transactions.

Registration Rights
Agreement

On
February 9, 2005 we entered into a registration rights agreement with our shareholders at
that time, according to which these shareholders, who held a total of 12,711,332 shares
prior to the offering and currently hold a total of 11,952,742 shares, have the right,
subject to some limited conditions, to demand that we file a registration statement on
their behalf to register their shares under the U.S. Securities Act of 1933. Each of the
shareholders has the right to make two such demands, with the exception of Vision Capital
LLC, which has the right to make one such demand. According to the agreement, we will bear
the registration fees, filing fees and certain other costs incurred in connection with the
registration resulting from the first of these demands by each shareholder, while the
shareholders will bear the costs resulting from a second such demand. Under the agreement,
the shareholders also have the right to demand that we include their shares in a
registration statement that we file on our behalf or on behalf of other shareholders.
These rights become effective six months after the effective date of our first
registration statement and will terminate either six years after the date of the agreement
or, with respect to any shareholder, at such a time as that shareholder either disposes of
its shares or will be able to sell all of the registrable securities it holds without
registration and without restrictions in compliance with Rule 144.

# 10.D EXCHANGE CONTROLS
AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS

There
are currently no Israeli currency control restrictions on payments of dividends or other
distributions with respect to our ordinary shares or the proceeds from the sale of the
shares, except for the obligation of Israeli residents to file reports with the Bank of
Israel regarding some transactions. However, legislation remains in effect under which
currency controls can be imposed by administrative action at any time.

The
ownership or voting of our ordinary shares by non-residents of Israel, except with respect
to citizens of countries which are in a state of war with Israel, is not restricted in any
way by our memorandum of association or articles of association or by the laws of the
State of Israel.

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# 10.E TAXATION

United States Taxation

The
following discussion is a summary of certain material U.S. federal income tax
considerations applicable to the ownership and disposition of shares by U.S. holders. In
general you will be a U.S. holder if:

| |  | you
are the beneficial owner of shares;
| | - | ---------------------------------------

| |  | you
are either (i) an individual resident or citizen of the United States, (ii) a corporation
or other               entity treated as a corporation for U.S. federal income tax
purposes created in or organized under the               laws of the United States or any
state thereof, (iii) an estate whose income is subject to U.S. federal
              income taxation regardless of its source, or (iv) a trust if a U.S. court
can exercise primary               supervision over the administration of the trust and
one or more U.S. persons are authorized to control               all substantial
decisions of the trust;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | you
own our shares as capital assets;
| | - | -------------------------------------

| |  | you
own directly or indirectly less than 10% of our outstanding voting stock;
| | - | -----------------------------------------------------------------------------

| |  | you
are fully eligible for benefits under the Limitation on Benefits article of the Income
Tax Treaty between the United States of America and the State of Israel, signed 20
November 1975 (the Treaty); and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | you
are not also a resident of Israel for Israeli tax purposes.
| | - | ---------------------------------------------------------------

The
Treaty benefits discussed below generally are not available to holders who hold shares in
connection with the conduct of business through a permanent establishment, or the
performance of personal services through a fixed base, in Israel.

If
a partnership holds shares, the tax treatment of a partner generally will depend upon the
status of the partner and the activities of the partnership. If you are a partner in a
partnership that holds shares, you are urged to consult your own tax advisor regarding the
specific tax consequences of owning and disposing of your shares.

The
summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to any particular holder, including tax considerations
that arise from rules of general application or that are generally assumed to be known by
U.S. holders. This summary is based on provisions of the Internal Revenue Code of 1986, as
amended (the Code), existing and proposed U.S. Treasury Regulations, rulings,
administrative pronouncements and judicial decisions in effect as of the date of this
annual report. All of the authorities are subject to change, possibly with retroactive
effect, and to differing interpretations. In addition, this summary does not discuss all
aspect of U.S. federal income taxation that may be applicable to investors in light of
their particular circumstances or to U.S. holders who are subject to special treatment
under U.S. federal income tax law, including insurance companies, dealers in stocks or
securities, financial institutions, tax-exempt organizations, persons subject to the
alternative minimum tax, and persons having a functional currency other than the U.S.
dollar.

U.S.   holders
are urged to consult with their own tax advisors regarding the tax           consequences
of the ownership and disposition of shares, including the effects           of U.S.
federal, state, local, Israeli, foreign and other tax laws with respect           to
their particular circumstances.

This
discussion assumes that we will not be considered a passive foreign investment company, as
discussed below.

Dividends

If
we make any distributions of cash or other property to you, you generally will be required
to include in gross income as ordinary dividend income the amount of any distributions
(including the amount of any Israeli taxes withheld in respect of such distribution as
described below in the section Israeli Taxation), to the extent that
such distributions are paid out of our current or accumulated earnings and profits as
determined for U.S. federal income tax purposes. Distributions in excess of our earnings
and profits will be applied against and will reduce your tax basis in your shares and, to
the extent in excess of such tax basis, will be treated as gain from a sale or exchange of
such shares. Dividends paid by us will not be eligible for the dividends received
deduction applicable in some cases to U.S. corporations.

Any
dividend paid in Israeli shekels, including the amount of any Israeli taxes withheld there
from, will be includible in your gross income in an amount equal to the U.S. dollar value
of the Israeli shekels calculated by reference to the spot rate of exchange in effect on
the date the dividend is received by you, regardless of whether the Israeli shekels are
converted into U.S. dollars. Any gain or loss resulting from currency exchange
fluctuations during the period from the date the dividend is includible in your gross
income to the date such payment is converted into U.S. dollars will be treated as U.S.
source ordinary income or loss.

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Any
dividends paid by us to you with respect to shares will be treated as foreign source
income and will be characterized as passive income or, in the case of some
U.S. holders, financial services income for U.S. foreign tax credit purposes.
For taxable years beginning January 1, 2007, dividend income generally will constitute
passive category income or, in the case of certain U.S. Holders, general
category income. Subject to the foreign tax credit limitation, you may elect to
claim a foreign tax credit against your U.S. federal income tax liability for Israeli
income tax withheld from dividends received in respect of shares at a rate not in excess
of that provided for in the Treaty. Taxes withheld in excess of the Treaty rate will not
be creditable against your U.S. federal income tax liability. The rules relating to the
determination of the foreign tax credit are complex. Accordingly, you should consult your
own tax advisor to determine whether and to what extent you would be entitled to the
credit. If you do not elect to claim a foreign tax credit, you may instead claim a
deduction for Israeli income tax withheld, but only for a year in which you elect to do so
with respect to all foreign income taxes.

Absent
an election, a U.S. holder that is an accrual method taxpayer generally must translate
Israeli taxes into U.S. dollars at a rate equal to the average exchange rate for the
taxable year in which the taxes accrue, but must translate taxable dividends into U.S.
dollars at the spot rate on the date received. This difference in exchange rates may
reduce the U.S. dollar value of the credits for Israeli taxes relative to its U.S. federal
income tax liability attributable to a dividend. An accrual method U.S. holder may elect
to translate Israeli taxes into U.S. dollars using the exchange rate in effect at the time
the taxes were paid. Any such election will apply for the taxable year in which it is made
and all subsequent years, unless revoked with the consent of the Internal Revenue Service
(IRS).

Qualified
dividend income received by individuals in taxable years beginning on or before
December 31, 2010 generally will be taxed at the rates applicable to capital gains (that
is, a maximum rate of 15%) rather than the rates applicable to other items of ordinary
income. For this purpose, qualified dividend income generally includes
dividends paid on shares of U.S. corporations as well as dividends paid on shares of
certain non-U.S. corporations if, among other things, (i) the shares of the non-U.S.
corporation are readily tradable on an established securities market in the United States,
or (ii) the non-U.S. corporation is eligible with respect to substantially all of its
income for the benefits of a comprehensive income tax treaty with the United States which
contains an exchange of information program (the Treaty has been identified by the U.S.
Treasury as a qualifying treaty). Dividends paid by us with respect to the shares should
constitute qualified dividend income for U.S. federal income tax purposes and
therefore U.S. holders who are individuals should, subject to applicable limitations, be
entitled to the reduced rates of tax.

Sale
or exchange of shares

Upon
the sale or other disposition of shares, you generally will recognize capital gain or loss
equal to the difference between the amount realized on the disposition and your adjusted
tax basis in your shares. Gain or loss upon the disposition of shares generally will be
U.S. source gain or loss, and will be treated as long-term capital gain or loss if, at the
time of the disposition, your holding period for the shares exceeds one year. If you are
an individual, any capital gains generally will be subject to U.S. federal income tax at
preferential rates if specified minimum holding periods are met. For shares held for over
one year and sold or exchanged in taxable years beginning on or before December 31, 2010,
the maximum rate of tax for individuals generally will be 15%. The deductibility of
capital losses is subject to significant limitations.

Passive
Foreign Investment Company status

We
currently believe that we will not be treated as a Passive Foreign Investment Company (a
PFIC) for U.S. federal income tax purposes for the taxable year ended December
31, 2005. However, this conclusion is a factual determination that must be made annually
and thus may be subject to change. A non-U.S. corporation will be classified as a PFIC for
any taxable year if at least 75% of its gross income consists of passive income (such as
dividends, interest, rents, royalties, or gains on the disposition of certain minority
interests), or at least 50% of the average value of its assets consists of assets that
produce, or are held for the production of, passive income, taking into account a
proportionate share of the income and assets of corporations at least 25% owned by such
corporation. If we were characterized as a PFIC for any taxable year, you could suffer
adverse tax consequences. These consequences may include having gains realized on the
disposition of shares and certain dividends treated as ordinary income earned over your
holding period for the shares taxable at maximum rates applicable during the years in
which it is treated as earned and subject to punitive interest charges for the deemed
deferral benefit. Furthermore, dividends paid by a PFIC would not be qualified
dividend income as discussed above.

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U.S.
information reporting and backup withholding

Dividend
payments with respect to shares and proceeds from the sale, exchange, redemption, or other
disposition of shares may be subject to information reporting to the IRS and possible U.S.
backup withholding at a current rate of 28%. Certain exempt recipients (such as
corporations) are not subject to these information reporting requirements. Backup
withholding will also not apply to a holder who furnishes a correct taxpayer
identification number or certificate of foreign status and makes any other required
certification. U.S. persons who are required to establish their exempt status generally
must provide IRS Form W-9 (Request for Taxpayer Identification Number and Certification).

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

Israeli Taxation

The
following summary describes the current tax structure applicable to companies in Israel,
with special reference to its effect on us. It also discusses Israeli tax consequences
material to persons purchasing our common shares. To the extent that the summary is based
on new tax legislation yet to be judicially or administratively interpreted, we cannot be
sure that the views expressed will be consistent with any future interpretation. The
summary is not intended, and should not be considered, to be legal or professional tax
advice and does not exhaust all possible tax considerations. Therefore, you should consult
your own tax advisor about the particular tax consequences of an investment in our common
shares.

Tax
Reform in Israel

On
January 1, 2003 a comprehensive tax reform took effect in Israel. Pursuant to the reform,
resident companies are subject to Israeli tax on income accrued or derived in Israel or
abroad. In addition, the concept of controlled foreign corporation was
introduced according to which a foreign company may become subject to Israeli taxes on
certain income of a non-Israeli subsidiary if the subsidiarys primary source of
income is passive income (such as interest, dividends, royalties, rental income or capital
gains). The tax reform also substantially changed the system of taxation of capital gains.

General
Corporate Tax Structure

Israeli
companies are currently subject to tax at the rate of 31% of taxable income. Beginning
from 2004, there has been a gradual reduction in the Israeli corporate tax rate from 35%
in 2004 to 34% in 2005, 31% in 2006 and 29% in 2007. From 2010 and onward the corporate
tax rate will be 25%. However, the effective tax rate payable by a company that derives
income from an approved enterprise may be considerably less, as further discussed below.

Tax
Benefits under the Law for the Encouragement of Capital Investments, 1959

The
Law for the Encouragement of Capital Investments, 1959 (the Investment Law),
provides that upon application to the Investment Center of the Ministry of Industry and
Commerce of the State of Israel, a proposed capital investment in eligible facilities may
be designated as an Approved Enterprise. Each certificate of approval for an Approved
Enterprise relates to a specific investment program delineated both by its financial
scope, including its capital sources, and by its physical characteristics, such as the
equipment to be purchased and utilized under the program. The tax benefits derived from
any certificate of approval relate only to taxable income derived from growth in
manufacturing revenues attributable to the specific 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 combination of the applicable rates. The
tax benefits under the law are not available for income derived from products manufactured
outside of Israel.

According
to the grant track, taxable income of a company derived from an Approved Enterprise is
subject to tax exemption or reduction to a rate of 10%-25% based on the level of foreign
ownership, rather than the usual rate described above, for the benefit period . This
period is seven till ten years also based on the level of foreign ownership beginning with
the year in which the Approved Enterprise first generates taxable income, and is limited
to 12 years from when production begins or 14 years from the date of approval, whichever
is earlier. A company owning an Approved Enterprise may elect to receive an alternative
package of benefits, which allows the company to receive tax exemptions rather than
grants. Under the alternative package, the companys undistributed income derived
from an Approved Enterprise will be exempt from tax for a period of between two and ten
years from the first year of taxable income, depending on the geographic location of the
Approved Enterprise within Israel, and the company will be eligible for the tax benefits
under the law for the remainder of the benefit period.

The
Investment Center bases its decision of whether to approve or reject a companys
application for designation as an Approved Enterprise on criteria described in the law and
related regulations, the then prevailing policy of the Investment Center and the specific
objectives and financial criteria of the applicant. Therefore, a company cannot be certain
in advance whether its application will be approved. In addition, the benefits available
to an approved enterprise are conditional upon compliance with the conditions stipulated
in the law and related regulations and the criteria described in the specific certificate
of approval. If a company violates these conditions, in whole or in part, it would be
required to refund the amount of tax benefits and any grants received plus an amount
linked to the Israeli consumer price index and interest.

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A
portion of our production facilities has been granted the status of an Approved
Enterprises under four programs of grants track. Income arising from our Approved
Enterprise facilities is exempted from tax for two years and entitled to reduced tax rates
based on the level of foreign ownership for a period of five to eight years. We have
derived and expect to continue to derive a certain portion of our income from our Approved
Enterprise facilities. Subject to compliance with applicable requirements, the current
benefits will continue until 2005 in respect of the second approved enterprise and until
2007 with respect to the third approved enterprise program. For the fourth program, the
period of benefits has not commenced yet. A portion of the facilities of our subsidiary
Eyal has also been granted the status of an Approved Enterprise under the alternative
package of benefits described above.

All
dividends are considered to be attributable to the entire enterprise and their effective
tax rate is the result of a weighted combination of the applicable tax rates. If we pay a
cash dividend from tax-exempt income that is derived from our approved enterprise, we
would be required to pay corporate tax on the amount intended to be distributed as
dividends at the reduced tax rate (maximum 25%). We would also be required to withhold on
behalf of the dividend recipient an additional 15% of the amount distributed as dividends.
The law also provides that an Approved Enterprise is entitled to accelerated depreciation
on its property and equipment that are included in an approved investment program.

In
March 2005, the government of Israel passed an amendment to the Investment Law in which it
revised the criteria for investments qualified to receive tax benefits as an Approved
Enterprise. Among other things, companies that meet the criteria of the alternate package
of tax benefits will receive those benefits without prior approval.

Special
Provisions Relating to Taxation under Inflationary Conditions

Until
December 31, 2004, Shamir was not assessed for tax purposes and its business results were
passed through to its shareholders. As a result, Shamirs tax expenses were not
included in the statements of income. Commencing January 1, 2005, Shamir became a taxable
entity as a result of the change in legal status from an ACS to a corporation which took
place in March 2005.

Results
for tax purposes of Israeli entities are measured and reflected in real terms in
accordance with the change in the Israeli Consumer Price Index (CPI) or
changes in the exchange rate of the NIS against the dollar for a Foreign Investors company.
Shamir has elected to measure its results for tax purposes on the basis of the changes in
the exchange rate of NIS against the dollar.

Tax
Benefits for Research and Development

Israeli
tax law allows a tax deduction in the year incurred for expenditures, including capital
expenditures, in scientific research and development projects, if the expenditures are
approved by the relevant Israeli government ministry and the research and development is
for the promotion of the enterprise. Expenditures not so approved are deductible over a
three-year period.

Tax
Benefits under the Law for the Encouragement of Industry (Taxes), 1969

According
to the Law for the Encouragement of Industry (Taxes), 1969, an industrial company is a
company resident in Israel, at least 90% of the income of which, exclusive 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 primary
activity in a given tax year is industrial production activity. We believe that we
currently qualify as an industrial company under this definition.

Under
the law, industrial companies are entitled to the following preferred corporate tax
benefits:

| | deduction
of purchases of know-how and patents over an eight-year period for tax purposes;
|- | ------------------------------------------------------------------------------------------

| | the
option to file a consolidated tax return with related Israeli industrial corporations
that satisfy      conditions described in the law; and
|- | ------------------------------------------------------------------------------------------------------------------------------------------------

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

Our
status as an industrial company is not contingent upon the receipt of prior approval from
any governmental authority. However, entitlement to certain benefits under the law is
conditioned upon receipt of approval from Israeli tax authorities. Also, the Israeli tax
authorities may determine that we do not qualify as an Industrial Company, which would
entail the loss of the benefits that relate to this status. In addition, we might not
continue to qualify for Industrial Company status in the future, in which case the
benefits described above might not be available to us in the future.

61

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Capital Gains Tax
Applicable to Resident and Non-Resident Shareholders

Israeli
law generally imposes a capital gains tax on the sale of capital assets located in Israel,
including shares in Israeli resident companies, by both residents and non-residents of
Israel, unless a specific exemption is available or unless a treaty between Israel and the
country of the non-resident provides otherwise.

On
January 1, 2003, the Law for Amendment of the Income Tax Ordinance (Amendment No. 132),
known as the tax reform, came into effect thus imposing capital gains tax at a rate of 15%
on gains derived on or after January 1, 2003 from the sale of shares in Israeli companies
publicly traded on a recognized stock exchange outside of Israel. This tax rate does not
apply to: (1) dealers in securities; (2) shareholders that report in accordance with the
Income Tax Law (Inflationary Adjustment)1985; or (3) shareholders who acquired their
shares prior to an initial public offering. The tax basis of shares acquired prior to
January 1, 2003 will be determined in accordance with the average closing share price in
the three trading days preceding January 1, 2003. Non-Israeli residents will be exempt
from Israeli capital gains tax on any gains derived from the sale of shares publicly
traded on a stock exchange outside Israel provided such shareholders did not acquire their
shares prior to an initial public offering. On January 1, 2004 the Israeli Ministry of
Finance issued regulations with a new definition of stock exchange. According
to the regulations, the definition includes stock exchanges outside of Israel for
securities and forward transactions that are managed in accordance with rules promulgated
by the authorized regulatory entity in the country where the stock exchange is managed.
The exemption does not apply to foreign residents who held the securities prior to an
initial public offering or who pay taxes according to the Inflationary Adjustments Law, or
if the capital gain derived from the sale is attributed to a Permanent Establishment in
Israel.

In
addition, pursuant to the Convention Between the Government of the United States of
America and the Government of Israel with Respect to Taxes on Income, as amended, or the
United States- Israel Tax Treaty, the sale, exchange or disposition of common shares by a
person who qualifies as a resident of the United States within the meaning of the United
States-Israel Tax Treaty and who is entitled to claim the benefits afforded to such person
by the United States-Israel Tax Treaty, or a Treaty U.S. Resident, generally will not be
subject to the Israeli capital gains tax unless such Treaty U.S. Resident holds, directly
or indirectly, shares representing 10% or more of our voting power during any part of the
12-month period preceding such sale, exchange or disposition, subject to certain
conditions. A sale, exchange or disposition of common shares by a Treaty U.S. Resident who
holds, directly or indirectly, shares representing 10% or more of our voting power at any
time during such preceding 12-month period would be subject to such Israeli tax, to the
extent applicable; however, under the United States-Israel Tax Treaty, such Treaty U.S.
Resident would be permitted to claim a credit for such taxes against the U.S. federal and
state income tax imposed with respect to such sale, exchange or disposition, subject to
the limitations in U.S. laws applicable to foreign tax credits.

Taxation
of Non-Resident Shareholders

Non-residents
of Israel are subject to Israeli income tax on income accrued or derived from sources in
Israel, including passive income such as dividends, royalties and interest. On
distributions of dividends, other than bonus shares and stock dividends, income tax at the
rate of 25% is withheld at the source, unless a different rate is provided in a treaty
between Israel and the shareholders country of residence. Under the U.S.-Israel Tax
Treaty, the maximum tax on dividends paid to a holder of common shares who is a Treaty
U.S. Resident will be 25% or 12.5% for dividends not generated by an approved enterprise
if the non-resident is a U.S. corporation and holds 10% or more of our voting power
throughout a certain period; however, under the Investment Law, dividends generated by an
approved enterprise are taxed at the rate of 15%.

Foreign
Exchange Regulations

Non-residents
of Israel who hold our common shares are able to receive any dividends, and any amounts
payable upon the dissolution, liquidation and winding up of our affairs, freely reparable
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.

# 10.F DIVIDENDS AND
PAYING AGENTS

Not
applicable.

62

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# 10.G STATEMENTS BY EXPERTS

Not
applicable.

# 10.H DOCUMENTS ON DISPLAY

We
are subject to the reporting and informational requirements of the Securities Exchange Act
of 1934, as amended. In accordance with these requirements, we file reports, including
annual reports on Form 20-F, and other information with the U.S. Securities and Exchange
Commission (SEC). However, as we are a foreign private issuer, we and our shareholders are
exempt from some of the Exchange Act reporting requirements. The reporting requirements
that do not apply to us or our shareholders include the proxy solicitation rules and
Section 16 short-swing profit reporting for our officers and directors and for holders of
more than 10% of our shares. In addition, we are not required to file annual, quarterly or
current reports and financial statements with the SEC as frequently or as promptly as U.S.
companies whose securities are registered under the Exchange Act. However, we will file
with the SEC, as long as we are required to do so, within 180 days after the end of each
fiscal year, an annual report on Form 20-F containing financial statements audited by an
independent accounting firm. We also intend to file periodic reports on Form 6-K. You may
read and obtain copies, at the prescribed rate, of any document we file with the SEC at
its public reference room at 450 Fifth Street, N.W., Washington D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for more information on the public reference rooms and their
copy charges. Our SEC filings are also available to you on the SECs web site at
www.sec.gov.

# 10.I SUBSIDIARY
INFORMATION

Not
applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We
do not engage in trading market risk instruments or purchasing hedging or other than
trading instruments that are likely to expose us to market risk, whether interest
rate, commodity price or equity price risk. From time to time we purchase options or enter
forward contracts to hedge our foreign currency risk. We have also entered into an
interest-rate swap. We do not use derivative instruments for speculative trading purposes.

Foreign Currency Risk

We
conduct our business primarily in US dollars and euro but also in the currencies of
Turkey, the United Kingdom, Israel as well as other currencies. Thus, we are exposed to
foreign exchange movements, primarily in Turkish, United Kingdom, European and Israeli
currencies. We monitor foreign currency exposure and, from time to time, may enter into
various derivative transactions intended to protect against changes in foreign currencies.
We currently hedge some of our foreign currency exposure to offset the effects of changes
in exchange rates. The derivative instruments were not designated as hedging instruments
in accordance with SFAS No. 133.

Our
foreign currency exposures give rise to market risks associated with exchange rate
movements of the dollar, our functional and reporting currency, against the euro and the
NIS and other currencies. In 2005 we generated approximately 39% of our revenues in
dollars and 54% in euros, and we incurred approximately 19% of our expenses in NIS, 27% in
dollars and 48% in euros.

In
Europe we operate through our subsidiary Altra, which has assets and liabilities in euros
and credit facilities in euros. In the United States we operate through our subsidiaries
Shamir Insight and Shamir USA, which have assets and liabilities in dollars. Shamir and
our Israeli subsidiary Eyal operate in Israel and have assets and liabilities mainly in
dollars, as well as some assets in euros and some liabilities in euros and NIS (for
employee compensation). We attempt to match our assets and liabilities in the same
currency in order to counteract fluctuations in currency exchange rates.

As
of December 31, 2005, we had $22.5 million in current assets and $18.4 million in current
liabilities that are denominated in euros. Additionally, we had $1.3 million in current
assets and $4.6 in current liabilities that are denominated in NIS.

63

---

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Interest Rate Risk

We
believe that we are not exposed to a material interest rate risk due to the fact that the
majority of our liabilities are short-term and most of our long-term liabilities are at a
fixed interest rate. Most of our assets are short-term assets.

Credit Risk

Credit
risk is the possibility that the value of our assets may become impaired if counterparties
cannot meet their obligations in transactions involving financial instruments. While we
may in a small number of instances be exposed to credit risk with respect to our customers
and our suppliers, we believe that this risk is not material.

# ITEM 12. DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES

Not
applicable

64

---

---



# PART II

# ITEM 13. DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES

None.

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

In
preparation for the initial public offering of our common shares in March 2005, we changed
the structure of our company from an A.C.S. into an Israeli limited liability company. As
part of this reorganization, we adopted new Articles of Association and restructured our
share capital by splitting the 105,506 existing shares so that each share with a par value
of NIS 1.00 was divided into 100 common shares with a par value of NIS 0.01 each. In
addition, we distributed to our shareholders out of our equity 2,160,732 new common shares
with a par value of NIS 0.01 each. With this distribution, the old shares of the A.C.S.
were in effect split at a ratio of 120.48-to-one, and our total issued and outstanding
share capital then amounted to NIS 127,113 consisting of 12,711,332 common shares with a
par value of NIS 0.01 each. We also created authorized share capital of 100,000,000 common
shares with a par value of NIS 0.01 each. As part of the March 2005 offering of our
shares, we then issued 3,400,000 new shares with a par value of NIS 0.01 each.

The
following use of proceeds information relates to our registration statement on Form F-1
(File No. 333-122736), filed by us in connection with our initial public offering. Our
shares commenced trading on the NASDAQ on March 11, 2005. William Blair & Company,
L.L.C., CIBC World Markets Corp. and C.E. Unterberg, Towbin, L.L.C. acted as
representatives for the underwriters.

The
following table sets forth for Shamir as the issuer our selling shareholders, information
regarding our shares registered and sold in our initial public offering, including the
exercise of the over-allotment option:

|                     | Amount Registered
and Sold | Aggregate Price
of the Amount Registered
and Sold to Date (US$)
|-------------------- | -------------------------- | ---------------------------------------------------------------
|
|
|
|
|Shamir               |                            |                                                                
|Selling Shareholders |                            |                                                                
|                     |                            |                                                                
|                     |                            |                                                                
|Total                |                            |                                                                

The
amount of expenses incurred by us in connection with the issuance and distribution of the
registered securities totaled $6,501,000 including $4,508,000 for underwriting discounts
and commissions, and approximately $1,993,000 for other expenses. None of the payments
were direct or indirect payments to our directors, officers, general partners of our
associates, persons owning 10% or more of any class of our shares, or any of our
affiliates.

We
used part of the net proceeds from the offering as follows:

| |  | to
pay approximately $2.2 million for early repayments of some of our outstanding
indebtedness;
| | - | -----------------------------------------------------------------------------------------------

| |  | to
pay a dividend payable of $5.2 million;
| | - | ------------------------------------------

| |  | to
pay approximately $2.3 million for establishing our new subsidiary in Turkey, including
the purchase of          facilities;
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | to
pay approximately $2.1 million for additional shares in our subsidiary Shamir Insight,
Inc., raising our          holdings to 90%;
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| |  | to
pay approximately $0.8 million to acquire 51% stake in our South Africa distributor;
| | - | ---------------------------------------------------------------------------------------

| |  | to
pay approximately $0.8 million to begin building new production facilities in Kibbutz
Shamir, Israel;
| | - | --------------------------------------------------------------------------------------------------------

| |  | to
pay approximately $0.5 million for establishing our new subsidiary in France; and
| | - | ------------------------------------------------------------------------------------

| |  | to
pay approximately $0.4 million to expand our marketing and distribution network in the
United States.
| | - | --------------------------------------------------------------------------------------------------------

65

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We
expect to use the remaining net proceeds from the offering as follows:

| |  | approximately
$9 million to build new production facilities in Shamir, Israel, which will focus mainly
on manufacturing and developing polycarbonate and finished lenses.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | approximately
$2.0 to $3.0 million to expand our marketing and distribution network in the United
States;
| | - | ---------------------------------------------------------------------------------------------------------

| |  | approximately
$1.0 million to expand our research and development team and facilities to enable us to
         develop new and advanced products, technologies and materials;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | approximately
$6.0 to $10.0 million for possible acquisitions or strategic investments in laboratories
in emerging markets and other complementary businesses, technologies or products; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | to
fund working capital requirements and other general corporate purposes.
| | - | --------------------------------------------------------------------------

As
part of our growth strategy, we seek to acquire independent laboratories in Europe in
order to strengthen our distribution network and to gain market share. We may also acquire
or invest in other businesses to support our marketing and distribution efforts. We may
pursue similar acquisitions or investments in China. We continually seek to identify
companies as potential objects of an acquisition, and we are currently investigating the
possibility of acquiring one of several potential candidates for an acquisition, but we
have not yet entered into any formal negotiations with any company regarding a potential
acquisition.

The
amount and timing of the expenditures listed above may vary depending upon a number of
factors, including, but not limited to, the amount of cash we generate from our
operations. Our plans for each of the potential uses of the proceeds from the offering are
currently at an early stage. We have not yet defined the precise actions, projects or
procedures that will be necessary for each potential use of these proceeds. Certain of
these uses (such as for acquisitions) will involve negotiations with third parties that
will determine the amounts allocated to that use, and the final amounts could vary widely,
depending on the results of the negotiations. As a result, we cannot currently determine
with certainty the amounts of proceeds that will be allocated for each of the purposes
stated above. While we have estimated the amounts we expect to use for those purposes that
we believe are capable of estimation, approximately $5.0 to $9.0 million of the net
proceeds is not yet allocated to a specific purpose. Our management will have significant
discretion in the use of the net proceeds, particularly the unallocated funds, and you may
disagree with the way these funds are utilized. We may find it necessary or advisable to
use portions of the net proceeds for other purposes, and we may apply the balance of the
net proceeds in other ways than the ones listed above. Until we use the proceeds of the
offering for the above purposes, we intend to invest the funds in short-term and
medium-term investment grade, interest bearing securities. See Item 5. Operating and
Financial Review and ProspectsLiquidity and Capital Resources for additional
information regarding our sources and uses of capital.

# ITEM 15. CONTROLS AND
PROCEDURES

Our
chief executive officer and our chief financial officer, with the assistance of other
members of management, performed an evaluation regarding the effectiveness our disclosure
controls and procedures, pursuant to Rule 13a-15 under the Securities Exchange Act of
1934, as amended, as of the end of the period covered by this annual report. Based on that
evaluation, they concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed in this annual report is recorded,
processed, summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission.

# ITEM 16. [RESERVED]

# ITEM 16A. AUDIT
COMMITTEE FINANCIAL EXPERT

Our
board of directors has determined that Zeev Feldman, member of our audit committee,
qualifies as an audit committee financial expert in accordance with the terms of this
item. All three members of our audit committee qualify as Independent
Directors under the listing rules of the Nasdaq National Market. See Item 6. Directors, Senior
Management and Employees.

# ITEM 16B. CODE OF ETHICS

We
have adopted a code of ethics and business conduct that applies to our chief executive
officer, our chief financial officer and our controller, as well as to the members of our
board of directors, all of our other executive officers and all of our employees. This
code of ethics is incorporated by reference.

66

---

---



# ITEM 16C. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

The
fees for professional services rendered by our auditors Kost Forer Gabbay & Kasierer,
a member of Ernst & Young Global, for the fiscal years ended December 31, 2004 and
2005 are set below.

|Audit Fees Shamir  | 2004 | 2005
|------------------ | ---- | ----
|
|
|
|
|Audit fees         |      |     
|Audit-related fees |      |     
|Tax fees           |      |     
|Other fees         |      |     
|                   |      |     
|Total              |      |     
|                   |      |     

Audit
fees consist of services that would normally be provided in connection with
statutory and regulatory fillings or engagements, including services that generally only
an independent auditor can reasonably provide. Audit-related fees relate
to assurance and associated services that traditionally are preformed by an independent
auditor, including: services in connection with a public offering of securities,
accounting consultation and consultation concerning financial accounting and reporting
standards. Tax feesare fees that relate to tax compliance, planning and
advise.

We
expect to propose to our annual meeting to engage Kost Forer Gabbay & Kasierer as our
auditors for the fiscal year ending December 31, 2006.

On
March 6, 2005 we changed the structure of our company from an Israeli A.C.S. to an
Israeli limited liability company. See Item 3. Key InformationCorporate
Reorganization. In the context of this reorganization and of our initial public
offering of our common shares and our concurrent listing on Nasdaq, we established an
audit committee of our board of directors. According to its charter, the committee is
responsible for assisting the board of directors in its oversight of, among others, the
independent auditors qualifications and independence and the performance of the
Companys internal audit function and independent auditors. In accordance with the
requirements of Israeli law, the committee is responsible for or shall make
recommendations regarding the appointment, retention, evaluation, remuneration,
independence, oversight and termination of the work of the independent auditor employed
by the Company (including resolution of disagreements between management and the
independent auditor regarding financial reporting) for the purpose of preparing or
issuing an audit report or performing other audit, review or attest services for the
Company.

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

We
have not and do not expect to apply for any exemptions from the Nasdaq listing standards
for audit committees.

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

Not
applicable.

67

---

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# PART III

# ITEM 17. FINANCIAL
STATEMENTS

We
have responded to Item 18 in lieu of responding to this item.

# ITEM 18. FINANCIAL
STATMENTS

The
following financial statements, together with the reports of Kost Forer Gabbay & Kasierer,
a member of Ernst & Young Global, for the fiscal years ended December 31, 2004 and
2005 are filed as part of this annual report:

|                                                                                                                | Page     
|--------------------------------------------------------------------------------------------------------------- | ---------
|
|
|
|
|Report of Independent Registered Public Accounting Firm                                                         | F-2      
|Consolidated Balance Sheets as of December 31, 2004 and 2005                                                    | F-3-F-4  
|Consolidated Statements of Income for the years ended December 31, 2003, 2004 and 2005                          | F-5      
|Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2003, 2004 and 2005 | F-6      
|Consolidated Statements of Cash Flows for the years ended December 31, 2003,2004 and 2005                       | F-7-F-9  
|Notes to Consolidated Financial Statements                                                                      | F-10-F-32

# ITEM 19. EXHIBITS

The
following exhibits are filed as part of this annual report:

|Exhibit Number |  | Description
|-------------- |  | -----------

|3.1 |  | Articles
of Association of Shamir.*
|--- |  | -----------------------------------

|5.1 |  | Opinion
of M. Seligman & Co. as to the validity of the shares.*
|--- |  | ---------------------------------------------------------------

|10.1 |  | Lease
agreement between Kibbutz Eyal and Eyal Optical Industries (1995) Ltd.*
|---- |  | -----------------------------------------------------------------------------

|10.2 |  | Working
services agreement between Shamir and Kibbutz Shamir.*
|---- |  | --------------------------------------------------------------

|10.3 |  | Service
agreement between Shamir and Kibbutz Shamir.*
|---- |  | -----------------------------------------------------

|10.4 |  | Lease
agreement between Kibbutz Shamir and the Israel Lands Administration.*
|---- |  | ----------------------------------------------------------------------------

|10.5 |  | Sublease
agreement between Shamir and Kibbutz Shamir, including amendment.*
|---- |  | ---------------------------------------------------------------------------

|10.6 |  | Loan
agreement between Shamir and Kibbutz Shamir.*
|---- |  | --------------------------------------------------

|10.7 |  | Shareholders'
agreement among the shareholders of Shamir.*
|---- |  | ----------------------------------------------------------

|10.8 |  | Registration
rights agreement between Shamir and certain of its shareholders.*
|---- |  | ------------------------------------------------------------------------------

|11 |  | Code
of Ethics of Shamir **
|-- |  | ---------------------------

|12.1 |  | Certification
of the Chief Executive Officer pursuant toss.302 of the Sarbanes-Oxley Act of 2002
|---- |  | ------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of the Chief Financial Officer pursuant toss.302 of the Sarbanes-Oxley Act of 2002
|---- |  | ------------------------------------------------------------------------------------------------

|13 |  | Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section
1350,               as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21 |  | Subsidiaries
of Shamir.*
|-- |  | ------------------------

*     Incorporated
by reference to our registration statement on Form F-1 filed with the SEC on February 11,
2005, as amended on March 8, 2005.

**     Incorporated
by reference to our annual report on Form 20-F Filed with the SEC on June 28, 2006.

68

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---



# SIGNATURES

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

| |  | SHAMIR OPTICAL INDUSTRY LTDBy: /s/ Giora Ben-Zeev
Giora Ben-ZeevChief Executive Officer
| |  | -----------------------------------------------------------------------------------------------------

| |  | By: /s/ Amir Hai
Amir HaiChief Financial Officer
| |  | --------------------------------------------------------------

Date: June 28, 2006

69

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---

SHAMIR OPTICAL INDUSTRY LTD
AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2005

IN U.S. DOLLARS

INDEX

|                                                             |  |            
|------------------------------------------------------------ |  | -----------
|                                                             |  | Page       
|                                                             |  |            
|                                                             |  |            
|Report of Independent Registered Public
  Accounting Firm    |  | F-2        
|                                                             |  |            
|Consolidated Balance Sheets                                  |  | F-3  F-4  
|                                                             |  |            
|Consolidated Statements of Income                            |  | F-5        
|                                                             |  |            
|Consolidated Statements of Changes in
  Shareholders Equity |  | F-6        
|                                                             |  |            
|Consolidated Statements of Cash Flows                        |  | F-7  F-9  
|                                                             |  |            
|Notes to Consolidated Financial Statements                   |  | F-10  F-40

F - 1

---

---



|                     |  |   |                                                                     |  |   |               |                           
|-------------------- |  | - | ------------------------------------------------------------------- |  | - | ------------- | --------------------------
|(ERNST & YOUNG LOGO)
|                     |  | n | Kost Forer Gabbay & Kasierer3 Aminadav St.
  Tel-Aviv 67067, Israel |  | n | Phone:
  Fax: | 972-3-6232525972-3-5622555

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the
Shareholders of

SHAMIR OPTICAL
INDUSTRY LTD

We
have audited the accompanying consolidated balance sheets of Shamir Optical
Industry Ltd (Shamir) and its subsidiaries (collectively the Company) as of
December 31, 2004 and 2005, and the related consolidated statements of income,
shareholders equity and cash flows for each of the three years in the period
ended December 31, 2005. These financial statements are the responsibility of
Shamirs management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In
our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of Shamir
and subsidiaries as of December 31, 2004 and 2005, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States.

|                    |                                 
|------------------- | --------------------------------
|Tel-Aviv, Israel    | KOST FORER GABBAY & KASIERER    
|February 28,
  2006 | A Member of Ernst & Young Global
|                    |                                 
|                    |                                 

F - 2

---

---



|                                                
|------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS SUBSIDIARIES
|                                                
|CONSOLIDATED BALANCE SHEETS                     
|                                                
|U.S. dollars in thousands                       

|                                                                                                                              |  |              |        |      |   |         | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- | - | ------- | 
|                                                                                                                              |  | December 31, |       
|                                                                                                                              |  |              |       
|                                                                                                                              |  | 2004         |        | 2005 |  
|                                                                                                                              |  |              |        |      |  
|                                                                                                                              |  |              |        |      |   |         | 
|ASSETS                                                                                                                        |  |              |        |      |   |         | 
|                                                                                                                              |  |              |        |      |   |         | 
|CURRENT ASSETS:                                                                                                               |  |              |        |      |   |         | 
|Cash and cash equivalents                                                                                                     |  | $            | 6,235  |      | $ | 27,502  | 
|Short-term investments                                                                                                        |  |              | -      |      |   | 14,474  | 
|Trade receivables (net of allowance for
  doubtful accounts of $ 533 and $ 474 at December 31, 2004 and 2005,
  respectively) |  |              | 15,394 |      |   | 17,230  | 
|Other receivables and prepaid expenses                                                                                        |  |              | 2,819  |      |   | 3,648   | 
|Inventory                                                                                                                     |  |              | 16,296 |      |   | 19,735  | 
|                                                                                                                              |  |              |        |      |   |         | 
|                                                                                                                              |  |              |        |      |   |         | 
|Total current
  assets                                                                                                        |  |              | 40,744 |      |   | 82,589  | 
|                                                                                                                              |  |              |        |      |   |         | 
|                                                                                                                              |  |              |        |      |   |         | 
|LONG-TERM INVESTMENTS:                                                                                                        |  |              |        |      |   |         | 
|Severance pay fund                                                                                                            |  |              | 1,765  |      |   | 2,032   | 
|Loan to related party                                                                                                         |  |              | 280    |      |   | 311     | 
|Investments in affiliates                                                                                                     |  |              | 666    |      |   | 679     | 
|                                                                                                                              |  |              |        |      |   |         | 
|                                                                                                                              |  |              |        |      |   |         | 
|Total long-term
  investments                                                                                                 |  |              | 2,711  |      |   | 3,022   | 
|                                                                                                                              |  |              |        |      |   |         | 
|                                                                                                                              |  |              |        |      |   |         | 
|PROPERTY, PLANT AND EQUIPMENT, NET                                                                                            |  |              | 15,609 |      |   | 19,903  | 
|                                                                                                                              |  |              |        |      |   |         | 
|                                                                                                                              |  |              |        |      |   |         | 
|OTHER ASSETS                                                                                                                  |  |              | 2,294  |      |   | 4,402   | 
|                                                                                                                              |  |              |        |      |   |         | 
|                                                                                                                              |  |              |        |      |   |         | 
|GOODWILL                                                                                                                      |  |              | 3,986  |      |   | 6,745   | 
|                                                                                                                              |  |              |        |      |   |         | 
|                                                                                                                              |  |              |        |      |   |         | 
|Total assets                                                                                                                  |  | $            | 65,344 |      | $ | 116,661 | 
|                                                                                                                              |  |              |        |      |   |         | 

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

F - 3

---

---



|                                                           
|-----------------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS SUBSIDIARIES           
|                                                           
|CONSOLIDATED BALANCE SHEETS                                
|                                                           
|U.S. dollars in thousands (except share and per share data)

|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- | - | ------- | -
|                                                                                                                                                                                                   |  | December 31, |       
|                                                                                                                                                                                                   |  |              |       
|                                                                                                                                                                                                   |  | 2004         |        | 2005 |  
|                                                                                                                                                                                                   |  |              |        |      |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|LIABILITIES AND
  SHAREHOLDERS EQUITY                                                                                                                                                             |  |              |        |      |   |         |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|CURRENT
  LIABILITIES:                                                                                                                                                                             |  |              |        |      |   |         |  
|Short-term bank credit and loans                                                                                                                                                                   |  | $            | 10,986 |      | $ | 8,403   |  
|Current maturities of long-term loans                                                                                                                                                              |  |              | 3,857  |      |   | 2,447   |  
|Trade payables                                                                                                                                                                                     |  |              | 4,624  |      |   | 8,072   |  
|Dividend payable                                                                                                                                                                                   |  |              | 5,201  |      |   | -       |  
|Accrued expenses and other liabilities                                                                                                                                                             |  |              | 7,820  |      |   | 8,996   |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|Total
  current liabilities                                                                                                                                                                        |  |              | 32,488 |      |   | 27,918  |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|LONG-TERM
  LIABILITIES:                                                                                                                                                                           |  |              |        |      |   |         |  
|Long-term loans (*)                                                                                                                                                                                |  |              | 8,177  |      |   | 10,637  |  
|Accrued severance pay                                                                                                                                                                              |  |              | 2,049  |      |   | 2,256   |  
|Deferred tax liabilities                                                                                                                                                                           |  |              | 432    |      |   | 886     |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|Total
  long-term liabilities                                                                                                                                                                      |  |              | 10,658 |      |   | 13,779  |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|MINORITY
  INTERESTS                                                                                                                                                                               |  |              | 4,568  |      |   | 3,576   |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|COMMITMENTS
  AND CONTINGENT LIABILITIES (Note 11)                                                                                                                                                 |  |              |        |      |   |         |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|TEMPORARY
  EQUITY:                                                                                                                                                                                |  |              |        |      |   |         |  
|Issued and
  outstanding: 502,400 shares at December 31, 2004 and no shares at December
  31, 2005                                                                                                 |  |              | 3,000  |      |   | -       |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|SHAREHOLDERS
  EQUITY:                                                                                                                                                                            |  |              |        |      |   |         |  
|Share capital-                                                                                                                                                                                     |  |              |        |      |   |         |  
|Common shares of NIS 0.01 par value:                                                                                                                                                               |  |              |        |      |   |         |  
|Authorized: 12,711,332 and 100,000,000
  shares at December 31, 2004 and 2005,respectively; Issued and outstanding:
  12,208,932 and 16,256,514 shares at December 31, 2004 and 2005, respectively |  |              | 29     |      |   | 37      |  
|Additional paid-in capital                                                                                                                                                                         |  |              | 10,053 |      |   | 65,055  |  
|Deferred stock compensation                                                                                                                                                                        |  |              | (844   | )    |   | (882    | )
|Accumulated other comprehensive income                                                                                                                                                             |  |              | 1,236  |      |   | 429     |  
|Retained earnings                                                                                                                                                                                  |  |              | 4,156  |      |   | 6,749   |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|Total
  shareholders equity                                                                                                                                                                       |  |              | 14,630 |      |   | 71,388  |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  
|Total
  liabilities and shareholders equity                                                                                                                                                       |  | $            | 65,344 |      | $ | 116,661 |  
|                                                                                                                                                                                                   |  |              |        |      |   |         |  

(*) Includes
$ 2,802 and $ 2,919 loans from minority shareholders as of December 31, 2004 and
2005, respectively.

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

F - 4

---

---



|                                                 
|-------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS SUBSIDIARIES 
|                                                 
|CONSOLIDATED STATEMENTS OF INCOME                
|                                                 
|U.S. dollars in thousands (except per share data)

|                                                        |                                                  |                         |        |       |   |        |    |   |        |     | 
|------------------------------------------------------- | ------------------------------------------------ | ----------------------- | ------ | ----- | - | ------ | -- | - | ------ | --- | 
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|                                                        |                                                  | Year ended December 31, |       
|                                                        |                                                  |                         |       
|                                                        |                                                  | 2003                    |        | 2004  |   | 2005   |   
|                                                        |                                                  |                         |        |       |   |        |   
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Revenues, net                                           |                                                  | $                       | 60,079 |       | $ | 71,269 |    | $ | 80,364 |    
|Cost of revenues                                        |                                                  |                         | 29,955 |       |   | 33,414 |    |   | 36,030 |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Gross profit                                            |                                                  |                         | 30,124 |       |   | 37,855 |    |   | 44,334 |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Operating expenses:                                     |                                                  |                         |        |       |   |        |    |   |        |    
|Research and development                                |                                                  |                         | 1,988  |       |   | 1,842  |    |   | 1,688  |    
|Selling and marketing                                   |                                                  |                         | 13,756 |       |   | 18,902 |    |   | 23,320 |    
|General and administrative                              |                                                  |                         | 3,564  |       |   | 4,502  |    |   | 6,622  |    
|Stock based compensation (*)                            |                                                  |                         | 1,809  |       |   | 82     |    |   | 608    |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Total operating expenses (**)                           |                                                  |                         | 21,117 |       |   | 25,328 |    |   | 32,238 |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Operating income                                        |                                                  |                         | 9,007  |       |   | 12,527 |    |   | 12,096 |    
|Financial income (expenses) and other, net              |                                                  |                         | (1,064 | )     |   | (864   | )  |   | 401    |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Income before taxes on income                           |                                                  |                         | 7,943  |       |   | 11,663 |    |   | 12,497 |    
|Taxes on income                                         |                                                  |                         | 1,095  |       |   | 1,549  |    |   | 4,504  |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Income after taxes on income                            |                                                  |                         | 6,848  |       |   | 10,114 |    |   | 7,993  |    
|Equity in losses of affiliates, net                     |                                                  |                         | (47    | )     |   | (48    | )  |   | -      |    
|Minority interest in losses (earnings) of subsidiaries  |                                                  |                         | (1,564 | )     |   | (1,254 | )  |   | 112    |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Net income                                              |                                                  | $                       | 5,237  |       | $ | 8,812  |    | $ | 8,105  |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Pro forma data (unaudited):                             |                                                  |                         |        |       |   |        |    |   |        |    
|Pro forma - additional taxes on income                  |                                                  | $                       | 1,187  |       | $ | 1,707  |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Pro forma net income                                    |                                                  | $                       | 4,050  |       | $ | 7,105  |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Net earnings per share:                                 |                                                  |                         |        |       |   |        |    |   |        |    
|Basic                                                   |                                                  | $                       | 0.43   |       | $ | 0.70   |    | $ | 0.52   |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Diluted                                                 |                                                  | $                       | 0.43   |       | $ | 0.68   |    | $ | 0.51   |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Pro forma net earnings per share (unaudited) (Note 2r): |                                                  |                         |        |       |   |        |    |   |        |    
|Basic                                                   |                                                  | $                       | 0.34   |       | $ | 0.56   |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|Diluted                                                 |                                                  | $                       | 0.33   |       | $ | 0.55   |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|                                                        |                                                  |                         |        |       |   |        |    |   |        |    
|(*)                                                     | Stock based compensation includes the following: |                         |        |       |   |        |    |   |        |     | 
|                                                        | Research and development                         |                         | $      | 1,809 |   | $      | -  |   | $      | -   | 
|                                                        | Selling and marketing                            |                         |        | -     |   |        | 13 |   |        | 343 | 
|                                                        | General and administrative                       |                         |        | -     |   |        | 69 |   |        | 265 | 
|                                                        |                                                  |                         |        |       |   |        |    |   |        |     | 
|                                                        |                                                  |                         | $      | 1,809 |   | $      | 82 |   | $      | 608 | 
|                                                        |                                                  |                         |        |       |   |        |    |   |        |     | 

|     |                                                                                                                                                                                                                                                                                                                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(**) | Includes the
  following expenses resulting from transactions with related parties for the
  years ended December 31, 2003, 2004 and 2005: cost of revenues - $ 931, $1,018
  and $954, respectively; research and development - $156, $106 and $102,
  respectively; selling and marketing - $276, $259 and $234, respectively;
  general and administrative - $826, $741, and $596, respectively.

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

F - 5

---

---



|                                                          
|----------------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD. AND ITS
  SUBSIDIARIES       
|                                                          
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|                                                          
|U.S. dollars in thousands (except share data)             

|                                                                                              |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   |   |       |   |   |         |  
|--------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ------------ | - | ---------------------------- |  | ----------------------------- | ------ | -------------------------------------------- | - | ---------------- | - | ---------------------------- | --------- | ------------------------ | - | ------- | - | - | ----- | - | - | ------- | -
|                                                                                              |  | Number
  of shares |            | Sharecapital |   | Additionalpaid-in 
  capital |  | Deferredstock 
  compensation |        | Accumulated other 
  comprehensive 
  income |   | Retainedearnings |   | Totalcomprehensive 
  income |           | Totalshareholdersequity |  
|                                                                                              |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |  
|Balance as of January 1, 2003                                                                 |  |                    | 12,047,971 |              | $ | 29                           |  | $                             | 5,014  |                                              | $ | -                |   | $                            | 314       |                          | $ | 6,192   |   |   |       |   | $ | 11,549  |  
|Distribution of earnings to
shareholders                                                      |  |                    | -          |              |   | -                            |  |                               | -      |                                              |   | -                |   |                              | -         |                          |   | (4,257  | ) |   |       |   |   | (4,257  | )
|Compensation related to grant of options to an
employee                                       |  |                    | -          |              |   | -                            |  |                               | 1,809  |                                              |   | -                |   |                              | -         |                          |   | -       |   |   |       |   |   | 1,809   |  
|Comprehensive income:                                                                         |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   |   |       |   |   |         |  
|Foreign currency translation
adjustments                                                      |  |                    | -          |              |   | -                            |  |                               | -      |                                              |   | -                |   |                              | 607       |                          |   | -       |   | $ | 607   |   |   | 607     |  
|Net income                                                                                    |  |                    | -          |              |   | -                            |  |                               | -      |                                              |   | -                |   |                              | -         |                          |   | 5,237   |   |   | 5,237 |   |   | 5,237   |  
|                                                                                              |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   |   |       |   |   |         |  
|Total comprehensive income                                                                    |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   | $ | 5,844 |   |   |         |  
|                                                                                              |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   |   |       |   |   |         |  
|Balance as of December 31, 2003                                                               |  |                    | 12,047,971 |              |   | 29                           |  |                               | 6,823  |                                              |   | -                |   |                              | **) 921   |                          |   | 7,172   |   |   |       |   |   | 14,945  |  
|Distribution of earnings to
shareholders                                                      |  |                    | -          |              |   | -                            |  |                               | -      |                                              |   | -                |   |                              | -         |                          |   | (11,828 | ) |   |       |   |   | (11,828 | )
|Issuance of shares, net                                                                       |  |                    | 160,961    |              |   | *) -                         |  |                               | 1,945  |                                              |   | -                |   |                              | -         |                          |   | -       |   |   |       |   |   | 1,945   |  
|Classification of liability into temporary
equity and exercise of call
  option               |  |                    | 502,400    |              |   | *) -                         |  |                               | 3,359  |                                              |   | -                |   |                              | -         |                          |   | -       |   |   |       |   |   | 3,359   |  
|Reclassification of puttable shares into
temporary equity                                     |  |                    | (502,400   | )            |   | *) -                         |  |                               | (3,000 | )                                            |   | -                |   |                              | -         |                          |   | -       |   |   |       |   |   | (3,000  | )
|Deferred stock compensation related to grant of
options to employees                          |  |                    | -          |              |   | -                            |  |                               | 926    |                                              |   | (926             | ) |                              | -         |                          |   | -       |   |   |       |   |   | -       |  
|Amortization of deferred stock
compensation                                                   |  |                    | -          |              |   | -                            |  |                               | -      |                                              |   | 82               |   |                              | -         |                          |   | -       |   |   |       |   |   | 82      |  
|Comprehensive income:                                                                         |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   |   |       |   |   |         |  
|Foreign currency translation
adjustments                                                      |  |                    | -          |              |   | -                            |  |                               | -      |                                              |   | -                |   |                              | 315       |                          |   | -       |   | $ | 315   |   |   | 315     |  
|Net income                                                                                    |  |                    | -          |              |   | -                            |  |                               | -      |                                              |   | -                |   |                              | -         |                          |   | 8,812   |   |   | 8,812 |   |   | 8,812   |  
|                                                                                              |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   |   |       |   |   |         |  
|Total comprehensive income                                                                    |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   | $ | 9,127 |   |   |         |  
|                                                                                              |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   |   |       |   |   |         |  
|Balance as of December 31, 2004                                                               |  |                    | 12,208,932 |              |   | 29                           |  |                               | 10,053 |                                              |   | (844             | ) |                              | **) 1,236 |                          |   | 4,156   |   |   |       |   |   | 14,630  |  
|Issuance of shares, net in the IPO                                                            |  |                    | 3,400,000  |              |   | 8                            |  |                               | 43,720 |                                              |   | -                |   |                              | -         |                          |   | -       |   |   |       |   |   | 43,728  |  
|Issuance of shares in respect of acquisition of
additional share of
  SII                     |  |                    | 145,182    |              |   | *) -                         |  |                               | 2,155  |                                              |   | -                |   |                              | -         |                          |   | -       |   |   |       |   |   | 2,155   |  
|Reclassification of puttable shares from
temporary equity                                     |  |                    | 502,400    |              |   | *) -                         |  |                               | 3,000  |                                              |   | -                |   |                              | -         |                          |   | -       |   |   |       |   |   | 3,000   |  
|Reclassification of retained earnings into
additional paid-in capital
  due to reorganization |  |                    | -          |              |   | -                            |  |                               | 5,512  |                                              |   | -                |   |                              | -         |                          |   | (5,512  | ) |   |       |   |   | -       |  
|Deferred stock compensation related to grant of
options to employees                          |  |                    | -          |              |   | -                            |  |                               | 338    |                                              |   | (338             | ) |                              | -         |                          |   | -       |   |   |       |   |   | -       |  
|Amortization of deferred stock
compensation                                                   |  |                    | -          |              |   | -                            |  |                               | -      |                                              |   | 300              |   |                              | -         |                          |   | -       |   |   |       |   |   | 300     |  
|Compensation expenses in respect of options
granted on subsidiarys
  shares                  |  |                    | -          |              |   | -                            |  |                               | 277    |                                              |   | -                |   |                              | -         |                          |   | -       |   |   |       |   |   | 277     |  
|Comprehensive income:                                                                         |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   |   |       |   |   |         |  
|Foreign currency translation
adjustments                                                      |  |                    | -          |              |   | -                            |  |                               | -      |                                              |   | -                |   |                              | (807      | )                        |   | -       |   | $ | (807  | ) |   | (807    | )
|Net income                                                                                    |  |                    | -          |              |   | -                            |  |                               | -      |                                              |   | -                |   |                              | -         |                          |   | 8,105   |   |   | 8,105 |   |   | 8,105   |  
|                                                                                              |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   |   |       |   |   |         |  
|Total comprehensive income                                                                    |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   | $ | 7,298 |   |   |         |  
|                                                                                              |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   |   |       |   |   |         |  
|Balance as of December 31, 2005                                                               |  |                    | 16,256,514 |              | $ | 37                           |  | $                             | 65,055 |                                              | $ | (882             | ) |                              | **) $ 429 |                          | $ | 6,749   |   |   |       |   | $ | 71,388  |  
|                                                                                              |  |                    |            |              |   |                              |  |                               |        |                                              |   |                  |   |                              |           |                          |   |         |   |   |       |   |   |         |  

|    |                                                                       
|--- | ----------------------------------------------------------------------
|*)  | Represent an amount less
  than $1.                                   
|    |                                                                       
|**) | The full amount represents
  foreign currency translation adjustments.

The
accompanying note is an integral part of the consolidated financial statements.

F - 6

---

---



|                                                
|------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS SUBSIDIARIES
|                                                
|CONSOLIDATED STATEMENTS OF CASH FLOWS           
|                                                
|U.S. dollars in thousands                       

|                                                                                             |  |                         |        |      |   |        |   |   |         |  
|-------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------- | -
|                                                                                             |  | Year ended December 31, |       
|                                                                                             |  |                         |       
|                                                                                             |  | 2003                    |        | 2004 |   | 2005   |  
|                                                                                             |  |                         |        |      |   |        |  
|                                                                                            
|Cash
  flows from operating activities:                                                      |  |                         |        |      |   |        |   |   |         |  
|                                                                                             |  |                         |        |      |   |        |   |   |         |  
|Net income                                                                                   |  | $                       | 5,237  |      | $ | 8,812  |   | $ | 8,105   |  
|Adjustments required to
reconcile net
  income to net cash provided by operating activities: |  |                         |        |      |   |        |   |   |         |  
|Depreciation and
amortization                                                                |  |                         | 3,658  |      |   | 3,805  |   |   | 4,729   |  
|Stock based
compensation                                                                     |  |                         | 1,809  |      |   | 82     |   |   | 608     |  
|Accrued severance pay,
net                                                                   |  |                         | (48    | )    |   | 31     |   |   | (60     | )
|Currency fluctuations of
long-term loans                                                     |  |                         | 988    |      |   | 363    |   |   | (672    | )
|Deferred taxes, net                                                                          |  |                         | (335   | )    |   | (11    | ) |   | 85      |  
|Equity in losses of affiliates,
net                                                          |  |                         | 47     |      |   | 48     |   |   | -       |  
|Minority interest in earnings
(losses) of subsidiaries                                       |  |                         | 1,564  |      |   | 1,254  |   |   | (112    | )
|Foreign currency translation
losses (gains)                                                  |  |                         | (1,821 | )    |   | (525   | ) |   | 712     |  
|Decrease (increase) in trade
receivables                                                     |  |                         | 1,971  |      |   | (62    | ) |   | (3,128  | )
|Increase in other receivables
and prepaid expenses                                           |  |                         | (258   | )    |   | (153   | ) |   | (264    | )
|Increase in inventory                                                                        |  |                         | (350   | )    |   | (3,123 | ) |   | (5,343  | )
|Increase (decrease) in trade
payables                                                        |  |                         | (1,812 | )    |   | (1,399 | ) |   | 3,786   |  
|Increase in accrued expenses
and other liabilities                                           |  |                         | 1,040  |      |   | 4      |   |   | 1,691   |  
|Others                                                                                       |  |                         | -      |      |   | (63    | ) |   | (135    | )
|                                                                                             |  |                         |        |      |   |        |   |   |         |  
|                                                                                             |  |                         |        |      |   |        |   |   |         |  
|Net cash provided by operating
activities                                                    |  |                         | 11,690 |      |   | 9,063  |   |   | 10,002  |  
|                                                                                             |  |                         |        |      |   |        |   |   |         |  
|                                                                                             |  |                         |        |      |   |        |   |   |         |  
|Cash flows from investing
activities:                                                        |  |                         |        |      |   |        |   |   |         |  
|                                                                                             |  |                         |        |      |   |        |   |   |         |  
|Loans granted to
affiliates                                                                  |  |                         | (52    | )    |   | (44    | ) |   | (13     | )
|Repayment of loans by
affiliates                                                             |  |                         | 129    |      |   | -      |   |   | -       |  
|Investment in
affiliates                                                                     |  |                         | -      |      |   | (98    | ) |   | -       |  
|Acquisition of Eyal
(a)                                                                      |  |                         | -      |      |   | (49    | ) |   | -       |  
|Acquisition of Cambridge
(b)                                                                 |  |                         | -      |      |   | (2,710 | ) |   | -       |  
|Acquisition of
Interoptic                                                                    |  |                         | -      |      |   | 298    |   |   | -       |  
|Acquisition of Altra Turkey
(c)                                                              |  |                         | -      |      |   | -      |   |   | (2,568  | )
|Acquisition of additional
shares in SII                                                      |  |                         | -      |      |   | -      |   |   | (2,077  | )
|Purchase of property, plant and
  equipment                                                  |  |                         | (5,270 | )    |   | (3,545 | ) |   | (7,860  | )
|Government participation in
purchase of
  property, plant and equipment                      |  |                         | 143    |      |   | -      |   |   | 83      |  
|Proceeds from sale of property
and
  equipment                                               |  |                         | 84     |      |   | 136    |   |   | 77      |  
|Proceeds from sale of shares in
Altra                                                        |  |                         | 761    |      |   | -      |   |   | -       |  
|Loan granted to related
party                                                                |  |                         | (207   | )    |   | (166   | ) |   | (136    | )
|Repayment of loan by related
party                                                           |  |                         | -      |      |   | -      |   |   | 105     |  
|Short-term
investments                                                                       |  |                         | -      |      |   | -      |   |   | (14,350 | )
|                                                                                             |  |                         |        |      |   |        |   |   |         |  
|                                                                                             |  |                         |        |      |   |        |   |   |         |  
|Net cash used in investing activities                                                        |  |                         | (4,412 | )    |   | (6,178 | ) |   | (26,739 | )
|                                                                                             |  |                         |        |      |   |        |   |   |         |  

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

F - 7

---

---



|                                                
|------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS SUBSIDIARIES
|                                                
|CONSOLIDATED STATEMENTS OF CASH FLOWS           
|                                                
|U.S. dollars in thousands                       

|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|------------------------------------------------------------------------------------------ |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                           |  | Year ended December 31, |       
|                                                                                           |  |                         |       
|                                                                                           |  | 2003                    |        | 2004 |   | 2005   |  
|                                                                                           |  |                         |        |      |   |        |  
|                                                                                          
|Cash
  flows from financing activities:                                                    |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Distribution of earnings to
  shareholders                                                 |  |                         | (4,257 | )    |   | (6,627 | ) |   | (5,201 | )
|Short-term bank credit and
loans, net                                                      |  |                         | 434    |      |   | 2,156  |   |   | (1,173 | )
|Proceeds from exercise of call
option                                                      |  |                         | -      |      |   | 2,000  |   |   | -      |  
|Issuance of shares,
net                                                                    |  |                         | -      |      |   | 1,649  |   |   | 42,571 |  
|Receipt of long-term
loans                                                                 |  |                         | 2,442  |      |   | 1,771  |   |   | 7,589  |  
|Repayment of long-term
loans                                                               |  |                         | (2,957 | )    |   | (3,648 | ) |   | (5,305 | )
|Dividend paid to minority by a
  subsidiary                                                |  |                         | -      |      |   | (94    | ) |   | -      |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by (used in)
  financing activities                                      |  |                         | (4,338 | )    |   | (2,793 | ) |   | 38,481 |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Effect of exchange rate differences on
  cash and cash equivalents                         |  |                         | 285    |      |   | 110    |   |   | (477   | )
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Increase in cash and cash equivalents                                                      |  |                         | 3,225  |      |   | 202    |   |   | 21,267 |  
|Cash and cash equivalents at beginning
  of year                                           |  |                         | 2,808  |      |   | 6,033  |   |   | 6,235  |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Cash and cash equivalents at end of
  year                                                 |  | $                       | 6,033  |      | $ | 6,235  |   | $ | 27,502 |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Supplemental information and
  disclosures of non-cash investing and financing activities: |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Issuance of shares as partial
  consideration of SII acquisition                           |  | $                       | -      |      | $ | -      |   | $ | 2,155  |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Deferred tax benefit on offering
  expense                                                 |  | $                       | -      |      | $ | -      |   | $ | 1,453  |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Distribution of earnings not
yet paid                                                      |  | $                       | -      |      | $ | 5,201  |   | $ | -      |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Cash paid during the period
for:                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Interest                                                                                   |  | $                       | 722    |      | $ | 895    |   | $ | 1,038  |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Income taxes                                                                               |  | $                       | 1,856  |      | $ | 1,854  |   | $ | 3,114  |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  

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

F - 8

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

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

|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|--- | -------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ----- | - | - | ----- | 
|    |                                                                                  |  | Year ended December 31, |       
|    |                                                                                  |  |                         |       
|    |                                                                                  |  | 2003                    |        | 2004 |   | 2005  |  
|    |                                                                                  |  |                         |        |      |   |       |  
|    |                                                                                  |  |                         |        |      |   |       |  
|(a) | Acquisition of Eyal:                                                             |  |                         |        |      |   |       |  
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|    | Fair value
  of assets acquired and liabilities assumed at the acquisition date: |  |                         |        |      |   |       |   |   |       | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|    | Working
  capital (excluding cash and cash equivalents)                          |  | $                       | 128    |      | $ | 49    |   |   |       | 
|    | Goodwill                                                                         |  |                         | 1,696  |      |   | -     |   |   |       | 
|    | Other
  intangible assets                                                        |  |                         | 579    |      |   | -     |   |   |       | 
|    | Minority
  interest                                                              |  |                         | 2,767  |      |   | -     |   |   |       | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|    |                                                                                  |  |                         | 5,170  |      |   | 49    |   |   |       | 
|    | Less -
  amounts acquired by assuming short-term bank credit                     |  |                         | (2,330 | )    |   | -     |   |   |       | 
|    | Less -
  amounts acquired by assuming long-term loans                            |  |                         | (1,481 | )    |   | -     |   |   |       | 
|    | Less -
  amounts acquired by issuance of combined put and call option            |  |                         | (1,359 | )    |   | -     |   |   |       | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|    |                                                                                  |  | $                       | -      |      | $ | 49    |   |   |       | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|(b) | Acquisition
  of Cambridge:                                                      |  |                         |        |      |   |       |   |   |       | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|    | Fair value
  of assets acquired and liabilities assumed at the acquisition date: |  |                         |        |      |   |       |   |   |       | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|    | Working
  capital (excluding cash and cash equivalents)                          |  |                         |        |      | $ | 479   |   |   |       | 
|    | Long-term
  deferred tax assets                                                  |  |                         |        |      |   | 428   |   |   |       | 
|    | Property and
  equipment                                                         |  |                         |        |      |   | 279   |   |   |       | 
|    | Other
  intangible assets                                                        |  |                         |        |      |   | 888   |   |   |       | 
|    | Goodwill                                                                         |  |                         |        |      |   | 1,798 |   |   |       | 
|    | Long-term loans                                                                  |  |                         |        |      |   | (896  | ) |   |       | 
|    | Long-term
  deferred tax liabilities                                             |  |                         |        |      |   | (266  | ) |   |       | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|    |                                                                                  |  |                         |        |      | $ | 2,710 |   |   |       | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|(c) | Acquisition
  of Altra Turkey                                                    |  |                         |        |      |   |       |   |   |       | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|    | Estimated
  fair value of assets acquired at the acquisition date:               |  |                         |        |      |   |       |   |   |       | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|    | Working
  capital (excluding cash and cash equivalents)                          |  |                         |        |      |   |       |   | $ | 541   | 
|    | Property and
  equipment                                                         |  |                         |        |      |   |       |   |   | 979   | 
|    | Other
  intangible assets                                                        |  |                         |        |      |   |       |   |   | 733   | 
|    | Goodwill                                                                         |  |                         |        |      |   |       |   |   | 315   | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 
|   
|    |                                                                                  |  |                         |        |      |   |       |   | $ | 2,568 | 
|    |                                                                                  |  |                         |        |      |   |       |   |   |       | 

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

F - 9

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- | ------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | a.      | General:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |         | Shamir
  Optical Industry Ltd (Shamir) was incorporated under the laws of the State
  of Israel in the early 1970s. Shamir and its subsidiaries (collectively -
  the Group) design, develop, manufacture and market optical progressive and
  other lenses and molds. The Groups products are marketed in the U.S through
  its U.S. subsidiaries, Shamir U.S.A. and Shamir Insight Inc.(SII) and in
  Europe through its German subsidiary Altra Trading GmbH and its European
  subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |         | On March 16,
  2005, Shamir completed an Initial Public Offering (IPO) in the NASDAQ stock
  exchange and issued 3,400,000 Common shares of NIS 0.01 par value in a net
  consideration of approximately $ 42,275 (excluding tax benefit of $ 1,453). On
  March 6, 2005, in connection with the IPO, the Company changed its structure
  from an Agricultural Cooperative Society (ACS) into an Israeli limited
  liability company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |         | Most of the
  raw materials used in the manufacture of lenses, including the Companys products,
  are available from a limited number of suppliers. The Company purchases its
  raw materials from some of these suppliers. The loss of any one of these
  suppliers, or a significant decrease in the supply of glass blanks or
  monomers, would require the Company to obtain these raw materials elsewhere.
  If the Company is unable to obtain glass blanks or monomers from its
  suppliers (or alternative suppliers) at acceptable prices, the Company may
  realize lower margins and experience difficulty in meeting its customers
  requirements.                                                                                                                                                                                                                                                                                                                                                                            
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |         | As for major
  customers data, see Note 15c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | b.      | Acquisition
  of Eyal Optical Industries (1998) Ltd. (Eyal):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |         | Up until the
  fourth quarter of 2003, Shamir held 51% of Eyal (an Israeli based company).
  Eyal is engaged in production processes for advanced plastic progressive
  lenses. In the fourth quarter of 2003, Shamir entered into an agreement with
  Kibbutz Eyal to purchase additional 47% of Eyals equity in an aggregate
  amount of $ 5,170, by assuming short-term bank credits in the amount of
  $ 2,330, long-term loans in the amount of $ 1,481. In addition, Shamir issued
  to the seller a Call option (the Call option) to purchase 502,400 shares of
  Shamir for a total exercise price of $ 2,000, exercisable through January 10, 2004.
  Shamir also wrote a Put option (the Put option) to the seller to sell the
  underlying shares (upon exercise of the Call option) back to Shamir for
  $ 3,000, from January 1, 2006 through January 10, 2010, or on the
  occurrence of earlier events concerning the structure or legal decisions by
  Shamir. On March 16, 2005, upon the IPO, the Put option expired.

F - 10

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | --------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 | The
  acquisition was accounted for by the purchase method and accordingly, the
  purchase price has been allocated according to the estimated fair value of
  the assets acquired and liabilities assumed of Eyal. The Call and Put options
  were recorded at their fair value as other long-term liability in accordance
  with Statement of Financial Accounting Standard Board (SFAS) No. 150,
  Accounting for Certain Financial Instruments with Characteristics of both Liabilities
  and Equity. The fair value of the combined Call and Put options was $ 1,359
  and was considered as part of the purchase price. On January 4, 2004,
  Kibbutz Eyal exercised its option to purchase 502,400 shares of Shamir for
  the amount of $ 2,000. Upon exercise of the Call option, as the related
  outstanding shares were redeemable for cash outside the control of Shamir,
  the Group recorded an amount of $ 3,000 as temporary equity.
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                 | The
  following table summarizes the fair values of the assets acquired and the
  buyout of the minority interest:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                            |  |   |       | 
| | -------------------------- |  | - | ----- | 
| | Current
  assets           |  | $ | 128   | 
| | Technology                 |  |   | 96    | 
| | Customer
  relationship    |  |   | 483   | 
| | Goodwill                   |  |   | 1,696 | 
| |                            |  |   |       | 
| |                            |  |   |       | 
| | Total assets
  acquired    |  |   | 2,403 | 
| |                            |  |   |       | 
| |                            |  |   |       | 
| | Minority
  interest buyout |  |   | 2,767 | 
| |                            |  |   |       | 
| |                            |  |   |       | 
| |                            |  | $ | 5,170 | 
| |                            |  |   |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Acquired other intangible assets in the
  amount of $ 579 with definite lives are amortized using the straight-line
  method at annual weighted average rate of approximately 17%.                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | On May 3, 2004, the Group acquired the
  remaining 2% of Eyals shares in consideration of $ 49.                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | c. | Acquisition
  of Cambridge Optical Group Limited (Cambridge):                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | On August 31, 2004, Altra acquired all of
  the outstanding shares of Cambridge, a UK based company. Altra paid £
  1,500 thousands (approximately $ 2,700). Under the terms of the acquisition
  agreement (the agreement), contingent cash payments will be paid if certain
  financial performance criteria with respect to Cambridge are met in the next
  three years. As of December 31, 2005, the financial performance criteria were
  not met.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Should any contingent payment be made under
  the agreement in the future, the additional consideration, when determined,
  will increase the purchase price and accordingly additional goodwill will be
  recorded.                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The
  acquisition was accounted for by the purchase method and accordingly, the
  purchase price has been allocated to the estimated fair value of the assets
  acquired and liabilities assumed of Cambridge. The results of Cambridges
  operations have been included in the consolidated financial statements of the
  Group starting August 31, 2004.                                                                                              

F - 11

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |                
|----------- | ---------------
|NOTE 1:    | GENERAL (Cont.)

| |  |                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------
| |  | With the
  acquisition of Cambridge, the Group expanded its customer base and its
  presence in Europe.
| |  |                                                                                                        
| |  | The
  following table summarizes the fair values of the assets acquired and
  liabilities assumed:     

| |                                    |  |   |        |   | 
| | ---------------------------------- |  | - | ------ | - | 
| | Current
  assets                   |  | $ | 1,554  |   | 
| | Long-term
  deferred tax assets    |  |   | 428    |   | 
| | Property and
  equipment           |  |   | 279    |   | 
| | Technology                         |  |   | 201    |   | 
| | Customer
  relationship            |  |   | 687    |   | 
| | Goodwill                           |  |   | 1,798  |   | 
| |                                    |  |   |        |   | 
| |                                    |  |   |        |   | 
| | Total assets
  acquired            |  |   | 4,947  |   | 
| |                                    |  |   |        |   | 
| |                                    |  |   |        |   | 
| | Current
  liabilities              |  |   | (1,075 | ) | 
| | Long-term
  loan                   |  |   | (896   | ) | 
| | Long-term
  deferred tax liability |  |   | (266   | ) | 
| |                                    |  |   |        |   | 
| |                                    |  |   |        |   | 
| | Total
  liabilities assumed        |  |   | (2,237 | ) | 
| |                                    |  |   |        |   | 
| | Net assets
  acquired              |  | $ | 2,710  |   | 
| |                                    |  |   |        |   | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Acquired
  other intangible assets in the amount of $888 with definite lives are
  amortized using the straight-line method at annual weighted average rate of
  23%.                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The
  following represents the unaudited pro-forma condensed results of operations
  for the years ended December 31, 2003 and 2004, assuming that the acquisition
  occurred on January 1, 2003 and 2004, respectively. The pro-forma information
  is not necessarily indicative of the results of operations, which actually
  would have occurred if the acquisition had been consummated at the beginning
  of each year presented, nor does it purport to represent the results of
  operations for future periods.

| |                                  |  |                         |        |      |   |        |  | 
| | -------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | 
| |                                  |  | Year ended December 31, |        |     
| |                                  |  |                         |        |     
| |                                  |  | 2003                    |        | 2004 |   |       
| |                                  |  |                         |        |      |   |       
| |                                  |  | Unaudited               |        |     
| |                                  |  |                         |        |     
| |                                  |  |                         |        |      |   |        |  | 
| | Revenues,
  net                  |  | $                       | 66,505 |      | $ | 78,295 |  | 
| |                                  |  |                         |        |      |   |        |  | 
| |                                  |  |                         |        |      |   |        |  | 
| | Net income                       |  | $                       | 5,212  |      | $ | 9,653  |  | 
| |                                  |  |                         |        |      |   |        |  | 
| |                                  |  |                         |        |      |   |        |  | 
| | Basic net
  earnings per share   |  | $                       | 0.41   |      | $ | 0.76   |  | 
| |                                  |  |                         |        |      |   |        |  | 
| |                                  |  |                         |        |      |   |        |  | 
| | Diluted net
  earnings per share |  | $                       | 0.40   |      | $ | 0.74   |  | 
| |                                  |  |                         |        |      |   |        |  | 

F - 12

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)
|                                                           

|            |                
|----------- | ---------------
|NOTE 1:    | GENERAL (Cont.)

| |    |                              
| | -- | -----------------------------
| | d. | Acquisition
  of Altra Turkey

| |                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 27,
  2005, Altra acquired all the assets of Emin Optic, a Turkish company that
  engaged in the business of producing spectacle lenses. Altra paid 3,430
  thousands New Turkish Lira ($ 2,568).                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                     
| | The asset
  purchase was accounted for as a business combination by the purchase method
  and accordingly, the purchase price has been allocated to the estimated fair
  value of the assets acquired. The results of Altra Turkeys operations have
  been included in the consolidated financial statements of the Group starting
  June 30, 2005.
| |                                                                                                                                                                                                                                                                                                                                                     
| | With the
  establishment of Altra Turkey, the Group expanded its customer base and its
  presence in Europe.                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                     
| | The
  following table summarizes the estimated fair values of the assets acquired:                                                                                                                                                                                                                                                                  

| |                          |  |   |       |  | 
| | ------------------------ |  | - | ----- |  | 
| | Inventory                |  | $ | 541   |  | 
| | Property and
  equipment |  |   | 979   |  | 
| | Technology               |  |   | 83    |  | 
| | Customer
  relationship  |  |   | 364   |  | 
| | Non-competition          |  |   | 286   |  | 
| | Goodwill                 |  |   | 315   |  | 
| |                          |  |   |       |  | 
| |                          |  |   |       |  | 
| | Total assets
  acquired  |  | $ | 2,568 |  | 
| |                          |  |   |       |  | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Acquired
  other intangible assets in the amount of $733 with definite lives are
  amortized using the straight-line method at an annual weighted average rate
  of 31%.                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | e. | Additional
  acquisition of shares of SII:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | On April 14,
  2005, Shamir acquired an additional 2.0% of the ownership interest and the
  voting power in SII, the American distribution center of Shamir, for the
  amount of $ 183, increasing its ownership interest to 58.7%.                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | On July 31,
  2005, Shamir signed an agreement to purchase an additional 31.3% stake in
  SII, increasing Shamir ownership interest in SII to 90%. The transaction
  consideration was approximately $ 1,894 in cash and 145,182 shares of Shamir
  valued at approximately $ 2,155 in newly issued common shares of Shamir. Under
  the terms of the agreement, annual contingent cash payments will be paid, for
  a period of five years, if certain financial performance criteria are met in
  respect of future earnings of SII in that period. The transaction was closed
  on September 30, 2005.

F - 13

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)
|                                                           

|            |                
|----------- | ---------------
|NOTE 1:    | GENERAL (Cont.)

| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Should any
  contingent payment be made under the agreement in the future, the additional
  consideration, when determined, will increase the purchase price and
  accordingly additional goodwill will be recorded.
| |                                                                                                                                                                                                                     
| | The
  acquisition was accounted for by the purchase method and accordingly, the
  purchase price has been allocated to the estimated fair value of the assets
  acquired and liabilities assumed of SII.            
| |                                                                                                                                                                                                                     
| | With the
  acquisition of additional shares of SII, Shamir increased its control on a
  critical distribution channel in the U.S.A.                                                                                 
| |                                                                                                                                                                                                                     
| | The
  following table summarizes the estimated fair values of the assets acquired,
  liabilities assumed and the buyout of the minority interest:                                                                   

| |                                    |  |   |       |   | 
| | ---------------------------------- |  | - | ----- | - | 
| | Distribution
  channels            |  | $ | 1,006 |   | 
| | Trade name                         |  |   | 688   |   | 
| | Goodwill                           |  |   | 2,640 |   | 
| |                                    |  |   |       |   | 
| |                                    |  |   |       |   | 
| | Total assets
  acquired            |  |   | 4,334 |   | 
| |                                    |  |   |       |   | 
| |                                    |  |   |       |   | 
| | Long-term
  deferred tax liability |  |   | (474  | ) | 
| |                                    |  |   |       |   | 
| |                                    |  |   |       |   | 
| | Net assets
  acquired              |  | $ | 3,860 |   | 
| |                                    |  |   |       |   | 
| |                                    |  |   |       |   | 
| | Minority
  interests buyout        |  | $ | 372   |   | 
| |                                    |  |   |       |   | 
| |                                    |  |   |       |   | 
| |                                    |  | $ | 4,232 |   | 
| |                                    |  |   |       |   | 

| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Acquired
  other intangible assets in the amount of $ 1,694 with definite lives are
  amortized using the straight-line method at an annual weighted average rate
  of 20%.

|            |                                
|----------- | -------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES

| |                                                                                                                                               |                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  consolidated financial statements have been prepared according to United
  States Generally Accepted Accounting Principles (US GAAP).
| |                                                                                                                                              
| | a.                                                                                                                                            | Use of
  estimates:                                                                                                                                                                                                                                                                                     
| |                                                                                                                                               |                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                               | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the amounts reported in the financial statements and accompanying
  notes. Actual results could differ from those estimates.

F - 14

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)
|                                                           

|            |                                        
|----------- | ---------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | Financial
  statements in U.S. dollars:                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The
  functional currency of Shamir and certain subsidiaries is the U.S. dollar
  (dollar), as the dollar is the primary currency of the economic environment
  in which Shamir and certain subsidiaries have operated and expect to continue
  to operate in the foreseeable future. The reporting currency of the Group is
  the dollar.                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Accordingly,
  monetary accounts maintained in currencies other than the dollar are
  remeasured into dollars in accordance with SFAS No. 52 Foreign Currency
  Translation. All transaction gains and losses of the remeasured monetary
  balance sheet items are reflected in the statement of income as financial
  income or expenses, as appropriate.                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | For those
  foreign subsidiaries whose functional currency has been determined to be a
  currency other than the U.S. dollar, assets and liabilities are translated at
  year-end exchange rates and statement of income items are translated at
  average exchange rates prevailing during the year of that currency.
  Translation adjustments are recorded in accumulated other comprehensive
  income, a separate component of shareholders equity.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | c. | Principles
  of consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The
  consolidated financial statements include the accounts of Shamir and its
  wholly and majority owned subsidiaries. Intercompany transactions and
  balances including profit from intercompany 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 to cash with maturities of three months or less at the date
  acquired.                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | e. | Short-term
  bank deposits:                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Bank deposits with
  maturities of more than three months but less than one year are included in
  short-term bank deposits. Such short-term bank deposits are stated at cost.
  The bank deposits have a 4.1% weighted average interest rate as of December
  31, 2005.                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | f. | Inventories:                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Inventories
  are stated at the lower of cost or market value. Cost is determined as
  follows:                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Raw
  materials and work-in-progress - using the method of first in - first out.                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Finished
  products - recorded on the basis of direct manufacturing costs with the
  addition of allocable indirect manufacturing costs, using the method of
  first in - first out.                                                                                                                                                                                                                                                                  

F - 15

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)
|                                                           

|            |                                        
|----------- | ---------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| |    |                                                                                                                                                                                                                                                                                                        
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Inventory
  provisions are provided to cover risks arising from slow-moving items, excess
  inventories and discontinued products. Inventory provisions have been
  included in cost of revenues.                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                        
| | g. | Investments
  in affiliates:                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                        
| |    | Affiliated
  companies are companies over which the Group can exercise significant
  influence on their operating and financial policies, including one company in
  which the Group holds less than 20%. The investment in affiliated companies
  is accounted for by the equity method of accounting.
| |    |                                                                                                                                                                                                                                                                                                        
| | h. | Property,
  plant and equipment:                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                        
| |    | Property,
  plant and equipment are stated at cost, net of accumulated depreciation and
  investment grants. Depreciation is calculated by the straight-line method
  over the estimated useful lives of the assets at the following annual rates:                                                     

| |                                         |  |       |  | 
| | --------------------------------------- |  | ----- |  | 
| |                                         |  | %     |  | 
| |                                         |  |       |  | 
|
| | Machinery
  and manufacturing equipment |  | 7-40  |  | 
| | Furniture
  and office equipment        |  | 7-33  |  | 
| | Motor
  vehicles                        |  | 15-33 |  | 
| | Buildings                               |  | 4-10  |  | 

| |    |                                                                                                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Leasehold
  improvements are depreciated by the straight-line method over the term of the
  lease or the estimated useful life of the improvements, whichever is shorter.                                                                                                                
| |    |                                                                                                                                                                                                                                                                                          
| | i. | Other
  intangible assets, net:                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                          
| |    | 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, in accordance with SFAS No. 142,
  Goodwill and Other Intangible Assets.
| |    |                                                                                                                                                                                                                                                                                          
| |    | Amortization
  is calculated using the straight-line method over the estimated useful lives
  at the following annual rates:                                                                                                                                                             

| |                         |  |                      |  | 
| | ----------------------- |  | -------------------- |  | 
| |                         |  | Weighted
  average % |  | 
| |                         |  |                      |  | 
|
| | Technology              |  | 23                   |  | 
| | Customer
  relationship |  | 22                   |  | 
| | Non
  competition       |  | 33                   |  | 
| | Distribution channels   |  | 20                   |  | 
| | Trade name              |  | 20                   |  | 

F - 16

---

---



|                                                           
|-----------------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | j.                                      | Impairment
  of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         | The Groups long-lived assets are reviewed
  for impairment in accordance with SFAS 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 assets to be held and used is measured by a
  comparison of the carrying amount of an asset to the future undiscounted cash
  flows expected to be generated by the asset. If such assets are considered to
  be impaired, the impairment to be recognized is measured by the amount by
  which the carrying amount of the assets exceeds the fair value of the assets.
  Assets to be disposed of are reported at the lower of the carrying amount or
  fair value less costs to sell. As of December 31, 2005, no impairment losses
  have been identified.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | k.                                      | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         | Goodwill represents excess of the costs
  over the net assets of businesses acquired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         | SFAS No. 142 requires goodwill to be tested
  for impairment at least annually or between annual tests in certain
  circumstances, and written down when impaired, rather than being amortized as
  previous accounting standards required. Goodwill attributable to the Groups
  reporting unit is tested for impairment by comparing the fair value of each
  reporting unit with its carrying value. Fair value is determined using
  discounted cash flows and market multiples. Significant estimates used in the
  methodologies include estimates of future cash flows, future short-term and
  long-term growth rates and estimates of market multiples for the reportable
  unit. As of December 31, 2005, no impairment losses have been identified.                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | l.                                      | Revenue recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         | The Group derives its revenues from sales
  of lenses and from design services to third party lens manufacturers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         | Revenues from sale of lenses are recognized
  in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue
  Recognition in Financial Statements, when delivery has occurred, persuasive
  evidence of an agreement exists, the vendors fee is fixed or determinable,
  no further obligation exists and collectibility is probable. The Group has
  various programs that allow opticians to earn rebates on their accumulated
  purchases. Rebates are recognized as a reduction of revenues, in accordance
  with EITF No. 01-9, Accounting for Consideration Given by a Vendor to a
  Customer (Including a Reseller of the Vendors Products).                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         | Design services are provided to third party
  manufacturers and include development services, production of molds for
  lenses and royalties from sales of lenses by third party manufacturers.
  Revenues from development services are recognized at the time services are
  provided. Revenues from production of molds are recognized upon delivery of
  the molds when all other criteria of SAB No. 104 are met. Revenues from
  minimum royalties are recognized when due. Other royalties are recognized
  quarterly, upon the receipt of sales reports from the third party
  manufacturer customers.                                                                                                                                                                                                                                                        

F - 17

---

---



|                                                           
|-----------------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | m.                                      | Research and development costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         | Research and development costs are charged
  to the statement of income as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | n.                                      | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         | Until 2005, no provision for income taxes
  was reflected in respect of Shamir (the parent company) in these financial
  statements, since the tax effects of Shamirs income were passed through to
  the individual shareholders. On March 6, 2005, in connection
  with the IPO, Shamir changed its structure from an Agricultural Cooperative
  Society (ACS) into an Israeli limited liability company.                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         | The Group accounts for income taxes in
  accordance with SFAS No. 109, Accounting for Income Taxes. 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 are measured
  using the enacted tax rates and laws that will be in effect when the
  differences are expected to reverse. The Group provides a valuation
  allowance, if necessary, to reduce deferred tax assets to their estimated
  realizable value.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | o.                                      | Advertising expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         | Advertising costs are expensed as incurred.
  Advertising expenses for the years ended December 31, 2003, 2004 and 2005
  were $ 2,895, $ 2,080 and $ 1,851, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | p.                                      | Concentrations of credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         | Financial instruments that potentially
  subject the Group to concentrations of credit risk consist principally of
  cash and cash equivalents, short-term investments and trade receivables. The
  majority of the Groups cash and cash equivalents and short-term investments
  are invested mainly in dollar and Euro instruments with major banks in
  Israel, Germany and the U.S. Management believes that the financial
  institutions that hold the Groups investments are financially sound and accordingly,
  minimal credit risk exists with respect to these investments.               
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         | The Groups trade receivables are derived
  from sales to customers located mainly in the U.S. and Europe. The Group
  performs ongoing credit evaluations of its customers and to date has not
  experienced any material losses. In certain circumstances, the Group may
  require letters of credit or prepayments. An allowance for doubtful accounts
  is determined with respect to those amounts that the Group has determined to
  be doubtful of collection. Provisions for doubtful accounts were recorded in
  general and administrative expenses.                                        

F - 18

---

---



|                                                           
|-----------------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            |                                         | The Company entered into forward contracts
  and option strategies (together: derivative instruments) intended to
  protect against changes in foreign currencies. The derivative instruments
  were not qualified for hedge accounting under SFAS No. 133. All the
  derivatives are recognized on the balance-sheet at their fair value, with
  changes in the fair value carried to the statements of income and included in
  financial income (expenses) and other, net.   
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | q.                                      | Severance pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | The Groups liability for severance pay is
  calculated pursuant to Israeli Severance Pay Law based on the most recent
  salary of the Groups Israeli employees multiplied by the number of years of
  employment, as of balance sheet date. These employees are entitled to one
  months salary for each year of employment or a portion thereof. The Groups
  liability for these employees is fully provided by monthly deposits for
  insurance policies and by an accrual.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | The deposited funds include profits
  accumulated up to the balance sheet date. 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.                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | Severance expenses for the years ended
  December 31, 2003, 2004 and 2005 amounted to $ 362, $ 388 and $ 463,
  respectively.                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | r.                                      | Net earnings per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | Basic net earnings per share are computed
  based on the weighted average number of shares outstanding during each year.
  Diluted net earnings per share are computed based on the weighted average
  number of shares outstanding during each year, plus dilutive potential shares
  considered outstanding during the year, in accordance with SFAS No. 128,
  Earnings per Share.                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | The total weighted average number of shares
  related to the outstanding options excluded from the calculations of diluted
  net earnings per share because these securities are anti-dilutive was
  120,480, 0 and 357,416 for the years ended December 31, 2003, 2004 and 2005,
  respectively.                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | Pro forma basic and diluted net earnings
  per share, as presented in the statements of income, have been calculated as
  described above and also give effect to the effect of pro-forma taxes on
  income and to conversion of the share capital into Common shares that
  occurred upon closing of the IPO on March 16, 2005.                                                                                                                                                  

F - 19

---

---



|                                                           
|-----------------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS SUBSIDIARIES           
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | s.                                      | Accounting for stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The Group has elected to follow Accounting
  Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
  Employees and FASB Interpretation (FIN) No. 44, Accounting for Certain
  Transactions Involving Stock Compensation in accounting for its employee
  share option plan. Under APB No. 25, when the exercise price of an employee
  share option is equivalent to or above the market price of the underlying
  stock on the date of grant, no compensation expense is recognized.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Pro-forma information regarding the Groups
  net income and net earnings per share is required by SFAS No. 123,
  Accounting for Stock-Based Compensation and SFAS No. 148, Accounting
  for Stock-Based Compensation - Transition and Disclosure and has been
  determined as if the Group had accounted for its employee share options under
  the fair value method prescribed by SFAS No. 123.                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The fair value for options granted in 2003,
  2004 and 2005 is amortized over their vesting period and estimated at the
  date of grant using the Black-Scholes options pricing model with the
  following assumptions:                                                                                                                                                                                                                                                                                      

| |                                                           |  |                         |    |      |  |      |   |  |    |  
| | --------------------------------------------------------- |  | ----------------------- | -- | ---- |  | ---- | - |  | -- | -
| |                                                           |  | Year ended December 31, |   
| |                                                           |  |                         |   
| |                                                           |  | 2003                    |    | 2004 |  | 2005 |  
| |                                                           |  |                         |    |      |  |      |  
| |                                                           |  |                         |    |      |  |      |  
| | Dividend yield                                            |  |                         | 0  | %    |  | 0    | % |  | 0  | %
| | Weighted average of expected volatility                   |  |                         | 34 | %    |  | 34   | % |  | 32 | %
| | Weighted average of risk free interest rate               |  |                         | 1  | %    |  | 1    | % |  | 4  | %
| | Weighted average expected life                            |  |                         | 4  |      |  | 4    |   |  | 5  |  
| |                                                           |  |                         |    |      |  |      |   |  |    |  
| | Pro forma information under SFAS No. 123 is
  as follows: | 

| |                                                                                                           |  |                         |        |      |   |       |   |   |        |  
| | --------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ----- | - | - | ------ | -
| |                                                                                                           |  | Year ended December 31, |       
| |                                                                                                           |  |                         |       
| |                                                                                                           |  | 2003                    |        | 2004 |   | 2005  |  
| |                                                                                                           |  |                         |        |      |   |       |  
| |                                                                                                           |  |                         |        |      |   |       |  
| | Net income available to shareholders - as
  reported                                                      |  | $                       | 5,237  |      | $ | 8,812 |   | $ | 8,105  |  
| | Add - stock-based employee compensation -
  intrinsic value, net of minority share related to SII options |  |                         | 1,809  |      |   | 82    |   |   | 498    |  
| | Deduct - stock-based employee compensation
  -fair value, net of minority share related to SII options    |  |                         | (1,968 | )    |   | (246  | ) |   | (1,418 | )
| |                                                                                                           |  |                         |        |      |   |       |   |   |        |  
| | Pro forma:                                                                                                |  |                         |        |      |   |       |   |   |        |  
| | Net income                                                                                                |  | $                       | 5,078  |      | $ | 8,648 |   | $ | 7,185  |  
| |                                                                                                           |  |                         |        |      |   |       |   |   |        |  
| |                                                                                                           |  |                         |        |      |   |       |   |   |        |  
| | Basic net earnings per share as reported                                                                  |  | $                       | 0.43   |      | $ | 0.70  |   | $ | 0.52   |  
| |                                                                                                           |  |                         |        |      |   |       |   |   |        |  
| |                                                                                                           |  |                         |        |      |   |       |   |   |        |  
| | Diluted net earnings per share as reported                                                                |  | $                       | 0.43   |      | $ | 0.68  |   | $ | 0.51   |  
| |                                                                                                           |  |                         |        |      |   |       |   |   |        |  
| |                                                                                                           |  |                         |        |      |   |       |   |   |        |  
| | Pro forma basic net earnings per share                                                                    |  | $                       | 0.42   |      | $ | 0.68  |   | $ | 0.47   |  
| |                                                                                                           |  |                         |        |      |   |       |   |   |        |  
| |                                                                                                           |  |                         |        |      |   |       |   |   |        |  
| | Pro forma diluted net earnings per share                                                                  |  | $                       | 0.42   |      | $ | 0.67  |   | $ | 0.46   |  
| |                                                                                                           |  |                         |        |      |   |       |   |   |        |  

F - 20

---

---



|                                                           
|-----------------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | t.                                      | Fair value
  of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The
  following methods and assumptions were used by the Group in estimating fair
  value and disclosures for financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The carrying
  amount reported in the balance sheet for cash and cash equivalents,
  short-term investments, trade receivables, short-term bank credit and trade
  payables approximate their fair values due to the short-term maturities of
  such instruments. The fair value of long-term loans is estimated by
  discounting the future cash flows using the current interest rate for loans
  of similar terms and maturities. The carrying amount of the long-term loans
  approximates their fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | u.                                      | Impact of
  recently issued accounting standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | In December
  2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
  (revised 2004), Share-Based Payment. SFAS No. 123(R) will provide investors
  and other users of financial statements with more complete and neutral
  financial information by requiring that the compensation cost relating to
  share-based payment transactions be recognized in financial statements. That
  cost will be measured based on the fair value of the equity or liability
  instruments issued. SFAS No. 123(R) covers a wide range of share-based
  compensation arrangements including share options, restricted share plans,
  performance-based awards, share appreciation rights and employee share
  purchase plans. SFAS No. 123(R) replaces SFAS No. 123, Accounting for
  Stock-Based Compensation, and supersedes APB No. 25, Accounting for Stock
  Issued to Employees. SFAS No. 123, as originally issued in 1995, established
  as preferable a fair-value-based method of accounting for share-based payment
  transactions with employees. However, that Statement permitted entities the
  option of continuing to apply the guidance in APB No. 25, as long as the
  footnotes to financial statements disclosed what net income would have been
  had the preferable fair-value-based method been used. Public entities will be
  required to apply SFAS No. 123(R) as of the first annual reporting period
  that begins after June 15, 2005.                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | As permitted
  by SFAS No. 123, the Company currently accounts for share-based payments to
  employees using APB No. 25s intrinsic value method. Accordingly, the
  adoption of SFAS No. 123(R)s fair value will have a significant impact on
  the Companys results of operations, although it will have no impact on its
  overall financial position. The Company plans to adopt SFAS No. 123(R) using
  the modified prospective method. Under this method, companies are required
  to recognize compensation cost for share-based payments to employees based on
  their grant-date fair value from the beginning of the fiscal period in which
  the recognition provisions are first applied. Measurement and recognition of
  compensation cost for awards that were granted prior to, but not vested as
  of, the date SFAS No. 123(R) is adopted would be based on the same estimate
  of the grant-date fair value and the same recognition method used previously
  under SFAS No. 123 (either for financial statement recognition or pro forma
  disclosure purposes). Any adjustments to recognize share-based liabilities at
  fair value (as opposed to intrinsic value under APB No. 25) will be
  recognized as the cumulative effect of a change in accounting principle. For
  those awards that are granted, modified, or settled after SFAS No. 123(R) is
  adopted, compensation cost will be measured and recognized in the financial
  statements in accordance with the provisions of SFAS No. 123(R). Prior
  periods would not be restated.

F - 21

---

---



|                                                  
|--------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | For periods
  prior to adoption, the financial statements are unchanged, and the pro forma
  disclosures previously required by SFAS No. 123 will continue to be required
  under the new Standard to the extent those amounts differ from those in the
  statements of operations. For periods subsequent to adoption, pro forma
  disclosures will not be necessary for periods that begin after the adoption
  date of the new Standard because the post-adoption statements of operations
  will reflect compensation cost for all share-based payments for which requisite
  service continues to be provided based on fair value. Additionally, if the
  Company did not estimate forfeitures prior to adopting SFAS No. 123(R),
  forfeitures will have to be estimated upon adoption. Those companies are
  required to recognize a cumulative effect of a change in accounting
  principles to reverse compensation cost recognized in the financial
  statements (not cost recognized only in the pro forma disclosures) in
  periods prior to the effective date of SFAS No. 123(R) for those awards that
  are not expected to vest.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | The impact
  of the adoption of SFAS 123(R) on future periods cannot be predicted at this
  time because it will depend on share-based payments granted in the future.
  However, had the Company adopted SFAS No. 123(R) in prior periods, the impact
  of the Standard would have approximated the impact of SFAS No. 123 as
  described in the disclosure of pro forma net loss and net loss per share in
  note 2(s).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | In March
  2005, the SEC staff issued Staff Accounting Bulletin No. 107 (SAB 107) to
  give guidance on implementation of SFAS 123(R), which the Company plans to
  adopt in implementing SFAS 123(R).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | In May 2005,
  the FASB issued SFAS No. 154 (SFAS 154), Accounting Changes and Error
  Corrections, a replacement of APB No. 20, Accounting Changes and SFAS No.
  3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154
  provides guidance on the accounting for and reporting of accounting changes
  and error corrections. APB No. 20 previously required that most voluntary
  changes in accounting principles be recognized by including in net income for
  the period of the change, the cumulative effect of changing to the new
  accounting principle. SFAS 154 requires retroactive application to prior
  periods financial statements of a voluntary change in accounting principles
  unless it is impracticable. SFAS 154 is effective for accounting changes and
  corrections of errors made in fiscal years beginning after December 15, 2005.
  The Company does not expect that the adoption of SFAS 154 will have a
  material impact on its financial position or results of operations.                                                                                                    

F - 22

---

---



|                                                  
|--------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         | In November
  2005, the FASB released FASB Staff Position Nos. FAS 115-1 and FAS 124-1,
  The Meaning of Other-Than-Temporary Impairment and Its Application to
  Certain Investments (FSP 115-1), which effectively replaces EITF Issue No.
  03-1. FSP 115-1 contains a three-step model for evaluating impairments and
  carries forward the disclosure requirements in EITF Issue No. 03-1 pertaining
  to securities in an unrealized loss position. Under the model, any security
  in an unrealized loss position is considered impaired; an evaluation is made
  to determine whether the impairment is other than temporary; and, if an
  impairment is considered other-thantemporary, a realized loss is recognized
  to write the securitys cost or amortized cost basis down to fair value. FSP
  115-1 references existing other than temporary impairment guidance for
  determining when an impairment is other than temporary and clarifies that
  subsequent to the recognition of an other-than-temporary impairment loss for
  debt securities, an investor shall account for the security using the
  constant effective yield method. FSP 115-1 is effective for reporting periods
  beginning after December 15, 2005, with earlier application permitted. The
  Company adopted FSP 115-1 upon issuance. The adoption of the Standards did
  not have a material effect on the Companys consolidated financial condition
  or results of operations.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|NOTE 3:    | OTHER RECEIVABLES AND PREPAID EXPENSES 

| |                          |  |              |       |      |   |       | 
| | ------------------------ |  | ------------ | ----- | ---- | - | ----- | 
| |                          |  | December 31, |      
| |                          |  |              |      
| |                          |  | 2004         |       | 2005 |  
| |                          |  |              |       |      |  
| |                          |  |              |       |      |   |       | 
| | Prepaid
  expenses       |  | $            | 281   |      | $ | 369   | 
| | Government
  authorities |  |              | 1,195 |      |   | 1,262 | 
| | Deferred tax
  assets    |  |              | 518   |      |   | 1,264 | 
| | Related
  parties        |  |              | 115   |      |   | 179   | 
| | Other                    |  |              | 710   |      |   | 574   | 
| |                          |  |              |       |      |   |       | 
| |                          |  |              |       |      |   |       | 
| |                          |  | $            | 2,819 |      | $ | 3,648 | 
| |                          |  |              |       |      |   |       | 

F - 23

---

---



|                                                  
|--------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

|            |          
|----------- | ---------
|NOTE 4:    | INVENTORY

|            |                                    |  |              |        |      |   |        | 
|----------- | ---------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
|            |                                    |  | December 31, |       
|            |                                    |  |              |       
|            |                                    |  | 2004         |        | 2005 |  
|            |                                    |  |              |        |      |  
|            |                                    |  |              |        |      |   |        | 
|            | Raw
  materials                    |  | $            | 2,106  |      | $ | 2,265  | 
|            | Work-in-progress                   |  |              | 371    |      |   | 314    | 
|            | Finished
  goods                   |  |              | 13,819 |      |   | 17,156 | 
|            |                                    |  |              |        |      |   |        | 
|            |                                    |  |              |        |      |   |        | 
|            |                                    |  | $            | 16,296 |      | $ | 19,735 | 
|            |                                    |  |              |        |      |   |        | 
|            |                                    |  |              |        |      |   |        | 
|NOTE 5:    | PROPERTY, PLANT AND EQUIPMENT, NET |  |              |        |      |   |        | 

| |                                            |  |              |        |      |   |        | 
| | ------------------------------------------ |  | ------------ | ------ | ---- | - | ------ | 
| |                                            |  | December 31, |       
| |                                            |  |              |       
| |                                            |  | 2004         |        | 2005 |  
| |                                            |  |              |        |      |  
| | Cost:                                      |  |              |        |      |   |        | 
| | Machinery and manufacturing equipment      |  | $            | 18,347 |      | $ | 21,951 | 
| | Furniture and office equipment             |  |              | 3,598  |      |   | 4,065  | 
| | Motor vehicles                             |  |              | 573    |      |   | 812    | 
| | Land, buildings and leasehold
improvements |  |              | 5,603  |      |   | 7,718  | 
| |                                            |  |              |        |      |   |        | 
| |                                            |  |              |        |      |   |        | 
| |                                            |  |              | 28,121 |      |   | 34,546 | 
| |                                            |  |              |        |      |   |        | 
| |                                            |  |              |        |      |   |        | 
| | Accumulated depreciation                   |  |              | 12,512 |      |   | 14,643 | 
| |                                            |  |              |        |      |   |        | 
| |                                            |  |              |        |      |   |        | 
| | Depreciated cost                           |  | $            | 15,609 |      | $ | 19,903 | 
| |                                            |  |              |        |      |   |        | 

| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Depreciation expense totaled $ 3,658, $ 3,632 and $ 4,228 for the
  years ended December 31, 2003, 2004 and 2005, respectively.
| |                                                                                                                                
| | As for pledges, see Note 11c.                                                                                                  

|            |             
|----------- | ------------
|NOTE 6:    | OTHER ASSETS

| |    |                
| | -- | ---------------
| | a. | Other
  assets:

| |                                    |  |              |       |      |   |       | 
| | ---------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
| |                                    |  | December 31, |      
| |                                    |  |              |      
| |                                    |  | 2004         |       | 2005 |  
| |                                    |  |              |       |      |  
| |                                    |  |              |       |      |   |       | 
| | Deferred tax
  assets              |  | $            | 641   |      | $ | 1,202 | 
| | Prepaid
  issuance costs           |  |              | 296   |      |   | -     | 
| | Other
  intangible assets, net (b) |  |              | 1,357 |      |   | 3,200 | 
| |                                    |  |              |       |      |   |       | 
| |                                    |  |              |       |      |   |       | 
| | Total other
  assets               |  | $            | 2,294 |      | $ | 4,402 | 
| |                                    |  |              |       |      |   |       | 

F - 24

---

---



|                                                   | 
|-------------------------------------------------- | 
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES
|                                                   | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                   | 
|U.S. dollars in thousands                          | 

|            |                     
|----------- | --------------------
|NOTE 6:    | OTHER ASSETS (Cont.)

| |    |     |                                
| | -- | --- | -------------------------------
| | b. | (1) | Other
  intangible assets, net:

| |                                 |  |              |       |      |   |       | 
| | ------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
| |                                 |  | December 31, |      
| |                                 |  |              |      
| |                                 |  | 2004         |       | 2005 |  
| |                                 |  |              |       |      |  
| | Original
  amounts:             |  |              |       |      |   |       | 
| | Technology                      |  | $            | 311   |      | $ | 370   | 
| | Customer relationship           |  |              | 1,219 |      |   | 1,503 | 
| | Non-competition                 |  |              | -     |      |   | 285   | 
| | Distribution channels           |  |              | -     |      |   | 1,006 | 
| | Trade name                      |  |              | -     |      |   | 688   | 
| |                                 |  |              |       |      |   |       | 
| |                                 |  |              |       |      |   |       | 
| |                                 |  |              | 1,530 |      |   | 3,852 | 
| |                                 |  |              |       |      |   |       | 
| | Accumulated
  amortization:     |  |              |       |      |   |       | 
| | Technology                      |  |              | 42    |      |   | 114   | 
| | Customer relationship           |  |              | 131   |      |   | 407   | 
| | Non-competition                 |  |              | -     |      |   | 47    | 
| | Distribution channels           |  |              | -     |      |   | 50    | 
| | Trade name                      |  |              | -     |      |   | 34    | 
| |                                 |  |              |       |      |   |       | 
| |                                 |  |              |       |      |   |       | 
| |                                 |  |              | 173   |      |   | 652   | 
| |                                 |  |              |       |      |   |       | 
| |                                 |  |              |       |      |   |       | 
| | Total other
  intangible assets |  | $            | 1,357 |      | $ | 3,200 | 
| |                                 |  |              |       |      |   |       | 

| |     |                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------
| | (2) | Amortization
  expense amounted to $ 0, $ 173 and $ 501 for the years ended December 31,
  2003, 2004 and 2005, respectively.
| |     |                                                                                                                              
| | (3) | Estimated
  amortization expense for the years ended:                                                                        

| |                       |  |              |       |  | 
| | --------------------- |  | ------------ | ----- |  | 
| |                       |  | December 31, |       | 
| |                       |  |              |       | 
| | 2006                  |  | $            | 857   |  | 
| | 2007                  |  |              | 825   |  | 
| | 2008                  |  |              | 709   |  | 
| | 2009                  |  |              | 435   |  | 
| | 2010 and
  thereafter |  |              | 374   |  | 
| |                       |  |              |       |  | 
|
| |                       |  | $            | 3,200 |  | 
| |                       |  |              |       |  | 

|            |         
|----------- | --------
|NOTE 7:    | GOODWILL

| |                                                                                                                    |  |   |       |   | 
| | ------------------------------------------------------------------------------------------------------------------ |  | - | ----- | - | 
| | The changes
  in the carrying amount of goodwill for the years ended December 31, 2004 and
  2005, are as follows:
| |                                                                                                                    |  |   |       |   | 
| | Balance as
  of January 1, 2004                                                                                    |  | $ | 2,034 |   | 
| | Goodwill acquired during the year                                                                                  |  |   | 1,798 |   | 
| | Foreign currency translation adjustments                                                                           |  |   | 154   |   | 
| |                                                                                                                    |  |   |       |   | 
|
| | Balance as
  of December 31, 2004                                                                                  |  |   | 3,986 |   | 
| | Goodwill acquired during the year                                                                                  |  |   | 2,955 |   | 
| | Foreign currency translation adjustments                                                                           |  |   | (196  | ) | 
| |                                                                                                                    |  |   |       |   | 
|
| | Balance as
  of December 31, 2005                                                                                  |  | $ | 6,745 |   | 
| |                                                                                                                    |  |   |       |   | 

F - 25

---

---



|                                                   | 
|-------------------------------------------------- | 
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES
|                                                   | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                   | 
|U.S. dollars in thousands                          | 

|            |                                       
|----------- | --------------------------------------
|NOTE 8:    | ACCRUED EXPENSES AND OTHER LIABILITIES

| |                                  |  |              |       |      |   |       | 
| | -------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
| |                                  |  | December 31, |      
| |                                  |  |              |      
| |                                  |  | 2004         |       | 2005 |  
| |                                  |  |              |       |      |  
|
| | Employees
  and payroll accruals |  | $            | 1,916 |      | $ | 2,378 | 
| | Accrued
  expenses               |  |              | 3,464 |      |   | 3,455 | 
| | Advances
  from customers        |  |              | 21    |      |   | 30    | 
| | Government
  authorities         |  |              | 1,158 |      |   | 2,630 | 
| | Others                           |  |              | 1,261 |      |   | 503   | 
| |                                  |  |              |       |      |   |       | 
|
| |                                  |  | $            | 7,820 |      | $ | 8,996 | 
| |                                  |  |              |       |      |   |       | 

|            |                                                                            
|----------- | ---------------------------------------------------------------------------
|NOTE 9:    | SHORT-TERM BANK CREDIT AND LOANS                                           
|            |                                                                            
|            | Short-term
  bank credit and loans are classified by currencies as follows:

| |                                                                                                                               |  |                                  |     |              |  |      |  |      |        |  |   |       | 
| | ----------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | --- | ------------ |  | ---- |  | ---- | ------ |  | - | ----- | 
| |                                                                                                                               |  | Weighted average
  interest rate |     |              |  |      |  |      |       
| |                                                                                                                               |  |                                  |     |              |  |      |  |      |       
| |                                                                                                                               |  | December 31,                     |     | December 31, | 
| |                                                                                                                               |  |                                  |     |              | 
| |                                                                                                                               |  | 2004                             |     | 2005         |  | 2004 |  | 2005 |       
| |                                                                                                                               |  |                                  |     |              |  |      |  |      |       
| |                                                                                                                               |  | %                                |     |              |  |      |  |      |       
| |                                                                                                                               |  |                                  |     |              |  |      |  |      |        |  |   |      
| | Short-term
  bank loans:                                                                                                      |  |                                  |     |              |  |      |  |      |        |  |   |       | 
| | Dollars                                                                                                                       |  |                                  | 3.9 |              |  | -    |  | $    | 322    |  | $ | -     | 
| | Euro                                                                                                                          |  |                                  | 3.6 |              |  | 3.8  |  |      | 8,662  |  |   | 7,809 | 
| |                                                                                                                               |  |                                  |     |              |  |      |  |      |        |  |   |       | 
| |                                                                                                                               |  |                                  |     |              |  |      |  |      |        |  |   |       | 
| |                                                                                                                               |  |                                  |     |              |  |      |  |      | 8,984  |  |   | 7,809 | 
| |                                                                                                                               |  |                                  |     |              |  |      |  |      |        |  |   |       | 
|
| | Short-term
  bank credit                                                                                                      |  |                                  | 3.3 |              |  | 3.5  |  |      | 2,002  |  |   | 594   | 
| |                                                                                                                               |  |                                  |     |              |  |      |  |      |        |  |   |       | 
|
| | Total
  short-term bank credit and loans                                                                                      |  |                                  | 3.5 |              |  | 3.8  |  | $    | 10,986 |  | $ | 8,403 | 
| |                                                                                                                               |  |                                  |     |              |  |      |  |      |        |  |   |       | 
| |                                                                                                                               |  |                                  |     |              |  |      |  |      |        |  |   |       | 
| | As of
  December 31, 2005, the Group had authorized unused credit lines from banks in
  the amount of approximately $ 11,200.

F - 26

---

---



|                                                   | 
|-------------------------------------------------- | 
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES
|                                                   | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                   | 
|U.S. dollars in thousands                          | 

|            |                
|----------- | ---------------
|NOTE 10:   | LONG-TERM LOANS

| |    |                                                           
| | -- | ----------------------------------------------------------
| | a. | Long-term
  loans are classified by currencies as follows:

| |                                          |  |               |     |              |  |      |  |      |        |  |   |        | 
| | ---------------------------------------- |  | ------------- | --- | ------------ |  | ---- |  | ---- | ------ |  | - | ------ | 
| |                                          |  | Interest rate |     |              |  |      |  |      |       
| |                                          |  |               |     |              |  |      |  |      |       
| |                                          |  | December 31,  |     | December 31, | 
| |                                          |  |               |     |              | 
| |                                          |  | 2004          |     | 2005         |  | 2004 |  | 2005 |       
| |                                          |  |               |     |              |  |      |  |      |       
| |                                          |  | %             |     |              |  |      |  |      |       
| |                                          |  |               |     |              |  |      |  |      |       
| | Banks:                                   |  |               |     |              |  |      |  |      |        |  |   |        | 
| | Dollars                                  |  |               | 4.0 |              |  | 5.4  |  | $    | 761    |  | $ | 141    | 
| | Euro                                     |  |               | 4.2 |              |  | 4.9  |  |      | 3,970  |  |   | 5,142  | 
| | NIS                                      |  |               | 4.5 |              |  | 4.6  |  |      | 1,729  |  |   | 1,448  | 
| |                                          |  |               |     |              |  |      |  |      |        |  |   |        | 
|
| |                                          |  |               |     |              |  |      |  |      | 6,460  |  |   | 6,731  | 
| | Minority
  shareholders in subsidiaries: |  |               |     |              |  |      |  |      |        |  |   |        | 
| | Euro                                     |  |               | 4.8 |              |  | 4.9  |  |      | 2,802  |  |   | 2,919  | 
| |                                          |  |               |     |              |  |      |  |      |        |  |   |        | 
|
| | Others:                                  |  |               |     |              |  |      |  |      |        |  |   |        | 
| | Dollars                                  |  |               | -   |              |  | 2.5  |  |      | -      |  |   | 55     | 
| | Euro                                     |  |               | 1.8 |              |  | 2.1  |  |      | 2,052  |  |   | 2,518  | 
| | GBP                                      |  |               | 6.8 |              |  | 6.7  |  |      | 720    |  |   | 861    | 
| |                                          |  |               |     |              |  |      |  |      |        |  |   |        | 
| |                                          |  |               |     |              |  |      |  |      |        |  |   |        | 
| |                                          |  |               |     |              |  |      |  |      | 2,772  |  |   | 3,434  | 
| |                                          |  |               |     |              |  |      |  |      |        |  |   |        | 
|
| | Total
  long-term loans                  |  |               |     |              |  |      |  |      | 12,034 |  |   | 13,084 | 
| |                                          |  |               |     |              |  |      |  |      |        |  |   |        | 
|
| | Less -
  current maturities              |  |               |     |              |  |      |  |      | 3,857  |  |   | 2,447  | 
| |                                          |  |               |     |              |  |      |  |      |        |  |   |        | 
|
| |                                          |  |               |     |              |  |      |  | $    | 8,177  |  | $ | 10,637 | 
| |                                          |  |               |     |              |  |      |  |      |        |  |   |        | 

| |    |                                                                                  
| | -- | ---------------------------------------------------------------------------------
| | b. | Long-term loans mature as follows (excluding loans from minority
  shareholders):

| |                             |  |   |        |  | 
| | --------------------------- |  | - | ------ |  | 
| | 2006
  (current maturities) |  | $ | 2,447  |  | 
| | 2007                        |  |   | 2,814  |  | 
| | 2008                        |  |   | 1,846  |  | 
| | 2009                        |  |   | 1,517  |  | 
| | 2010 and
  thereafter       |  |   | 1,541  |  | 
| |                             |  |   |        |  | 
|
| |                             |  | $ | 10,165 |  | 
| |                             |  |   |        |  | 

| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The repayments of the loans from minority shareholders in
  subsidiaries are subject to certain events which are not likely to occur
  within the continuing twelve months following December 31, 2005.

F - 27

---

---



|                                                   | 
|-------------------------------------------------- | 
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES
|                                                   | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                   | 
|U.S. dollars in thousands                          | 

|            |                                       
|----------- | --------------------------------------
|NOTE 11:   | COMMITMENTS AND CONTINGENT LIABILITIES

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Legal
  proceedings:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | In November
  2003, one of the Groups laboratory customers in the United States was
  notified by a large lens manufacturer that the manufacturer believes that the sales of a certain lens constitutes an
  infringement of a certain patent of this manufacturer. The Group have
  denied any such infringement allegations and has entered into negotiations
  with the manufacturer with regard to this patent in order to reach a
  resolution. The Group cannot predict the outcome of the claim nor can it make
  any estimate of the amount of damages, if held responsible.                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | In September
  2003, the Group received a separate and, on the face of it, unrelated
  notification from a different large lens manufacturer in which the
  manufacturer claimed that the lenses produced using the Groups prescription
  software infringe upon a U.S. patent held by the manufacturer. In subsequent correspondence, the manufacturer
  stated that it believed only one claim of the patent to be infringed.
  The Group has denied any such infringement. The Group has entered into
  discussions with this manufacturer and has asked for clarification of his
  claims. The Group cannot predict the outcome of the claim nor can it make any
  estimate of the amount of damages, if held responsible.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | b. | Lease
  commitments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The land and
  certain of the Groups facilities are leased under operating lease
  agreements. Future minimum lease commitments under non-cancelable operating
  leases for the specified periods ending after December 31, 2005 are as
  follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| |                                                                                                                                    |  |   |        | 
| | ---------------------------------------------------------------------------------------------------------------------------------- |  | - | ------ | 
| | 2006                                                                                                                               |  | $ | 1,074  | 
| | 2007                                                                                                                               |  |   | 1,141  | 
| | 2008                                                                                                                               |  |   | 1,137  | 
| | 2009                                                                                                                               |  |   | 1,122  | 
| | Thereafter                                                                                                                         |  |   | 8,686  | 
| |                                                                                                                                    |  |   |        | 
|
| |                                                                                                                                    |  | $ | 13,160 | 
| |                                                                                                                                    |  |   |        | 
| |                                                                                                                                    |  |   |        | 
| | Lease
  expenses for the years ended December 31, 2003, 2004 and 2005 were
  approximately $ 273, $ 572 and $ 1,082, respectively.

F - 28

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                                |                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- | ---------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11:   | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|            |                                                |                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | c.                                             | Pledges:                                                                                                                                                                                                                                                              
|            |                                                |                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                | 1.                                                                                                                                                                                                                                                                     | In order to
  secure government grants received by Shamir and Eyal under the Approved
  Enterprise programs pursuant to the Law for the Encouragement of Capital
  Investments, 1959, Shamir and Eyal granted pledges in favor of the State of
  Israel on all of its assets, by floating pledges unlimited in amount (see
  also Note 12d).                                                                                                                                                                                                                         
|            |                                                |                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                | 2.                                                                                                                                                                                                                                                                     | To secure
  the fulfillment of Shamirs liabilities, Shamir granted a fixed pledge,
  unlimited in amount, in favor of banks, on its issued and outstanding share
  capital and goodwill and a floating pledge on all of its assets and rights.
  To secure the fulfillment of Eyal and Eyal Holdings liabilities, they
  granted pledges, unlimited in amount, in favor of banks, on all of their
  assets. Additionally, another of Shamirs subsidiary pledged its land and
  building in an aggregate amount of approximately $1,330 to secure bank
  commitments.
|            |                                                |                                                                                                                                                                                                                                                                       
|            | d.                                             | The minority
  shareholder in Altra has a put option exercisable for seven years beginning
  December 31, 2004, to sell 15% of the shares he holds in Altra to Shamir per
  year, at a price based on the fair value of the net assets of Altra at the
  time of sale.

|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|----------- | --------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 12:   | TAXES ON INCOME
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | a.              | Up until
  December 31, 2004, Shamir was not assessed for tax purposes and its business
  results were passed through to its shareholders. As a result, tax expenses of
  Shamir were not included in the statements of income. Commencing January 1,
  2005, Shamir became a taxable entity as a result of the change in legal
  status from an ACS to a corporation which took place in March 2005 (see also
  Note 1a).
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|            | b.              | Measurement
  of taxable income:                                                                                                                                                                                                                                                                                                                                                                                          
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|            |                 | Results for
  tax purposes of Israeli entities are measured and reflected in real terms in
  accordance with the change in the Israeli Consumer Price Index (CPI) or
  changes in the exchange rate of the NIS against the dollar for a foreign
  investors company. Shamir has elected to measure its results for tax
  purposes on the basis of the changes in the exchange rate of NIS against the
  dollar.       
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|            | c.              | Tax benefits
  under Israels Law for the Encouragement of Industry (Taxation), 1969:                                                                                                                                                                                                                                                                                                                                     
|            |                 |                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|            |                 | Shamir and
  Eyal are Industrial companies, as defined by the above-mentioned law, and
  as such, are entitled to certain tax benefits including the right to deduct
  public issuance expenses and accelerated depreciation for tax purposes.                                                                                                                                                                          

F - 29

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|----------- | ----------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 12:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|            | d.                      | Tax benefits
  under the Israel Law for the Encouragement of Capital Investments, 1959 (the
  Law):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|            |                         | Four
  programs of Shamir have been granted an Approved Enterprise status under
  the Law. According to the Law, Shamir is entitled to investment grants (up to
  30% of investment cost) and also to a tax benefit, which grants Shamir tax
  exemption for a period of two years and a reduced tax rate of 25% for a
  period of five years. The period of benefits in respect of the first program
  was terminated in 2001. The period of benefits in respect of the second
  program- of Shamir terminated in 2005 and the period of benefits in respect
  of the third program will terminate in 2007. For the fourth program, the
  period of benefits has not commenced yet.
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                         | Income of
  Shamir from sources other than the Approved Enterprise during the period of
  benefits will be taxable at the regular corporate tax rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|            |                         | Certain
  programs of Eyals production facilities have been granted Approved
  Enterprise status under the Law. For these programs, Eyal has elected
  alternative benefits, waiving grants in return for tax exemptions. Income
  derived from the expansion programs is tax-exempt for a period of two years
  and is taxed at the reduced corporate tax rate of 25% for an additional
  period of five years. Income of Eyal from sources other than the Approved
  Enterprise during the period of benefits is taxable at the regular corporate
  tax rate.                                                                                                                  
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|            |                         | The period
  of tax benefits detailed above is subject to limits of the earlier of 12
  years from the commencement of production or 14 years from receiving the
  approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|            |                         | The Law also
  entitles Shamir and Eyal to claim accelerated depreciation on equipment used
  by the Approved Enterprise during five tax years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|            |                         | The
  entitlement to the above benefits is subject to fulfilling the conditions
  stipulated by the Law, regulations published thereunder and instruments of
  approval for the specific investments in Approved Enterprises. In the event
  of failure to comply with these conditions, the benefits may be canceled and
  Shamir or Eyal may be required to refund the amount of the benefits, in whole
  or in part, including interest. As of December 31, 2005, Management believes
  that both Shamir and Eyal are meeting all conditions of the approvals.                                                                                                                   
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|            |                         | A recent
  amendment to the Law, which has been officially published effective as of
  April 1, 2005 (the Amendment) has changed certain provisions of the Law.
  The Amendment enacted changes in the manner in which tax benefits are awarded
  under the Law so that companies no longer require Investment Center approval
  in order to qualify for tax benefits. The Companys existing Approved
  Enterprises will not be subject to the provisions of the Amendment.                                                                                                                                                                                                        
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|            | e.                      | Net operating losses carryforward:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|            |                         | As of
  December 31, 2005, the Company had carry forward tax losses in certain tax
  jurisdictions, most of which are derived from the Companys subsidiary in the
  U.K. totaling approximately $ 3,200, which can be carried forward
  indefinitely.                                                                                                                                                                                                                                                                                                                                                                                                                                

F - 30

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|----------- | ----------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 12:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|            | f.                      | Changes in
  tax rates in Israel:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|            |                         | Until
  December 31, 2003, the regular tax rate applicable to income of companies
  (which are not entitled to benefits due to Approved Enterprise, as
  described above) was 36%. In June 2004, an amendment to the Income Tax
  Ordinance (No. 140 and Temporary Provision), 2004 was passed by the Knesset
  (Israeli parliament) and on July 25, 2005, another law was passed, the
  amendment to the Income Tax Ordinance (No. 147) 2005, according to which the
  corporate tax rate is to be progressively reduced to the following tax rates:
  2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26%, 2010
  and thereafter - 25%.
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|            | g.                      | Deferred tax
  assets (liabilities):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|            |                         | Deferred
  taxes reflect the net tax effect of temporary differences between the
  carrying amounts of assets and liabilities for financial reporting purposes
  and the amounts used for tax purposes. Components of the Groups deferred tax
  assets and liabilities are as follows:                                                                                                                                                                                                                                                                                                                                                                         

| |                                    |  |              |       |      |   |       |  
| | ---------------------------------- |  | ------------ | ----- | ---- | - | ----- | -
| |                                    |  | December 31, |      
| |                                    |  |              |      
| |                                    |  | 2004         |       | 2005 |  
| |                                    |  |              |       |      |  
| | Deferred tax
  assets:             |  |              |       |      |   |       |  
| | Issuance costs and others          |  | $            | 641   |      | $ | 1,258 |  
| | Net operating losses carry forward |  |              | 518   |      |   | 1,208 |  
| |                                    |  |              |       |      |   |       |  
| |                                    |  |              |       |      |   |       |  
| | Total
  deferred tax assets        |  |              | 1,159 |      |   | 2,466 |  
| |                                    |  |              |       |      |   |       |  
| |                                    |  |              |       |      |   |       |  
| | Deferred tax
  liabilities:        |  |              |       |      |   |       |  
| | Property and equipment             |  |              | (168  | )    |   | (257  | )
| | Other intangible assets            |  |              | (264  | )    |   | (629  | )
| |                                    |  |              |       |      |   |       |  
| |                                    |  |              |       |      |   |       |  
| | Total
  deferred tax liabilities   |  |              | (432  | )    |   | (886  | )
| |                                    |  |              |       |      |   |       |  
| |                                    |  |              |       |      |   |       |  
| | Net deferred
  tax assets *)       |  | $            | 727   |      | $ | 1,580 |  
| |                                    |  |              |       |      |   |       |  

| |  |    |                                                                                                                                                                                                                                          
| |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | *) | Deferred tax
  assets of $ 518 and $ 1,264 have been included in other receivables and prepaid
  expenses and $ 641 and $ 1,202 have been included in other assets, as of
  December 31, 2004 and 2005, respectively (see 3 and Note 6a).

F - 31

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                         |                                                                                                          
|----------- | ----------------------- | ---------------------------------------------------------------------------------------------------------
|NOTE 12:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                          
|            | h.                      | A
  reconciliation of the Groups effective tax rate to the statutory tax rate in
  Israel is as follows:

| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| | ----------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ------ | -- | - | ------ | --
| |                                                                                                                   |  | Year ended December 31, |      
| |                                                                                                                   |  |                         |      
| |                                                                                                                   |  | 2003                    |       | 2004 |   | 2005   |   
| |                                                                                                                   |  |                         |       |      |   |        |   
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| | Income before taxes on income                                                                                     |  | $                       | 7,943 |      | $ | 11,663 |    | $ | 12,497 |   
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| | Statutory tax rate in Israel                                                                                      |  |                         | 36    | %    |   | 35     | %  |   | 34     | % 
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| | Increase (decrease) in tax
  expenses resulting from:                                                             |  |                         |       |      |   |        |    |   |        |   
| | Income passed through to Shamirs
  shareholders                                                                  |  |                         | (14.4 | )%   |   | (18.4  | )% |   | -      |   
| | Approved Enterprise benefits                                                                                    |  |                         | (7.6  | )%   |   | (2.8   | )% |   | (6.9   | )%
| | Tax expenses related to change of tax
  status                                                                    |  |                         | -     |      |   | -      |    |   | 3.3    | % 
| | Taxes in respect of prior years                                                                                   |  |                         | (1.4  | )%   |   | -      |    |   | 1.2    | % 
| | Others                                                                                                            |  |                         | 1.2   | %    |   | (0.5   | )% |   | 4.4    | % 
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| | Effective tax rate                                                                                                |  |                         | 13.8  | %    |   | 13.3   | %  |   | 36.0   | % 
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| | Pro-forma additional taxes on income in
  respect of income passed to the shareholders (unaudited)                |  |                         | 14.9  | %    |   | 14.6   | %  |   |        |   
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| | Pro-forma effective tax rate (unaudited)                                                                          |  |                         | 28.7  | %    |   | 27.9   | %  |   |        |   
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   
| | Basic and diluted net earnings per share
  amounts of the benefit resulting from the Approved Enterprise status |  | $                       | 0.05  |      | $ | 0.03   |    | $ | 0.05   |   
| |                                                                                                                   |  |                         |       |      |   |        |    |   |        |   

| |    |                                                        |  |   |       |  |   |        |  |   |        | 
| | -- | ------------------------------------------------------ |  | - | ----- |  | - | ------ |  | - | ------ | 
| | i. | Income before taxes on income is comprised as follows:
| |    |                                                        |  |   |       |  |   |        |  |   |        | 
| |    | Domestic                                               |  | $ | 4,439 |  | $ | 9,095  |  | $ | 11,943 | 
| |    | Foreign                                                |  |   | 3,504 |  |   | 2,568  |  |   | 554    | 
| |    |                                                        |  |   |       |  |   |        |  |   |        | 
| |    |                                                        |  |   |       |  |   |        |  |   |        | 
| |    |                                                        |  | $ | 7,943 |  | $ | 11,663 |  | $ | 12,497 | 
| |    |                                                        |  |   |       |  |   |        |  |   |        | 

F - 32

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |                         |                                          
|----------- | ----------------------- | -----------------------------------------
|NOTE 12:   | TAXES ON INCOME (Cont.)
|            |                         |                                          
|            | j.                      | Taxes on income are comprised as follows:

| |                                                         |  |                           |       |      |   |       |   |   |       |  
| | ------------------------------------------------------- |  | ------------------------- | ----- | ---- | - | ----- | - | - | ----- | -
| |                                                         |  | Year ended
  December 31, |      
| |                                                         |  |                           |      
| |                                                         |  | 2003                      |       | 2004 |   | 2005  |  
| |                                                         |  |                           |       |      |   |       |  
|
| | Current taxes                                           |  | $                         | 1,539 |      | $ | 1,553 |   | $ | 4,274 |  
| | Taxes in respect of prior years                         |  |                           | (109  | )    |   | 7     |   |   | 145   |  
| | Deferred tax expenses related to change of
  tax status |  |                           | -     |      |   | -     |   |   | 414   |  
| | Deferred tax benefit                                    |  |                           | (335  | )    |   | (11   | ) |   | (329  | )
| |                                                         |  |                           |       |      |   |       |   |   |       |  
| |                                                         |  |                           |       |      |   |       |   |   |       |  
| |                                                         |  | $                         | 1,095 |      | $ | 1,549 |   | $ | 4,504 |  
| |                                                         |  |                           |       |      |   |       |   |   |       |  
| |                                                         |  |                           |       |      |   |       |   |   |       |  
| | Domestic                                                |  | $                         | (214  | )    | $ | 789   |   | $ | 3,861 |  
| | Foreign                                                 |  |                           | 1,309 |      |   | 760   |   |   | 643   |  
| |                                                         |  |                           |       |      |   |       |   |   |       |  
| |                                                         |  |                           |       |      |   |       |   |   |       |  
| |                                                         |  | $                         | 1,095 |      | $ | 1,549 |   | $ | 4,504 |  
| |                                                         |  |                           |       |      |   |       |   |   |       |  

|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- | -------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:   | SHAREHOLDERS EQUITY
|            |                     
|            | a.                   | General:                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                      | All share
  and per share data included in these financial statements for all periods
  presented have been retroactively adjusted to reflect the reorganization of
  Shamirs equity approved on March 6, 2005, according to which each share of
  Shamir was converted into 120.48 Common shares of the reorganized
  corporation.                                                                                       
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                            
|            | b.                   | Share
  rights:                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                      | Common
  shares of Shamir confer upon their holders the right to receive notice to
  participate and vote in the general meetings of Shamir and the right to
  receive dividends when declared.                                                                                                                                                                                                                            
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                            
|            | c.                   | Issuance of
  shares:                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                      | On June 28,
  2004, Shamir issued 160,961 shares to a third party investor for a net amount
  of $ 1,945.                                                                                                                                                                                                                                                                                                                  
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                      | On March 16,
  2005, Shamir issued 3,400,000 shares of NIS 0.01 par value in a net
  consideration of approximately $ 42,275 (excluding tax benefit of $ 1,453), as
  part of its IPO in the NASDAQ stock exchange.                                                                                                                                                                                                        
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                      | On March 16,
  2005, upon the IPO, the Put option that was granted as part of Eyal
  acquisition expired, and Shamir reclassified 502,400 putable shares from
  temporary equity into shareholders equity. In addition, Shamir classified
  the balance of its undistributed earnings as of March 16, 2005 (the date of
  IPO) in the amount of $5,512 into additional paid in capital in accordance
  with SAB Topic 4.B.

F - 33

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | ---------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:   | SHAREHOLDERS EQUITY (Cont.)
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | d.                           | Share option
  plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                              | In 2003 and on February 1, 2006, Shamir adopted employee share option
  plans (the 2003 Option Plan and the 2005 General Share and Incentive
  Plan, respectively). Under the 2003 Option Plan, employees and officers of
  the Group may be granted options to acquire shares. The number of options to
  acquire Common shares and the related exercise price are determined by the
  Board of Directors of Shamir.
  Grants of options to directors are also approved by shareholders meetings.
  The 2005 General
  Share and Incentive Plan provides
  that 25% of the shares shall vest one year after the date of grant,
  and the remaining 75% shall vest on a monthly basis, with 1/36 of the
  remaining shares vesting on each month commencing at the end of the first
  anniversary of the date of grant, unless approved otherwise. According to the
  2005 General Share and Incentive Plan during the year 2006 we may grant
  350,000 options to purchase our shares and in each following year the option
  pool shall increase by an additional 280,000 options.
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                              | A summary of the activity in the share options granted to employees
  and related information is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| |                                            |  |                     |         |                                   |   |                     |  |                                    |           |                     |   |                                   |  |  |           |  |   |       | 
| | ------------------------------------------ |  | ------------------- | ------- | --------------------------------- | - | ------------------- |  | ---------------------------------- | --------- | ------------------- | - | --------------------------------- |  |  | --------- |  | - | ----- | 
| |                                            |  | December
  31,      |        
| |                                            |  |                     |        
| |                                            |  | 2003                |         | 2004                              |   | 2005                | 
| |                                            |  |                     |         |                                   |   |                     | 
| |                                            |  | Number of
  options |         | Weighted
  average exercise price |   | Number of
  options |  | Weighted
  average exercise  price |           | Number of
  options |   | Weighted
  average exercise price | 
| |                                            |  |                     |         |                                   |   |                     |  |                                    |           |                     |   |                                   | 
| |                                            |  |                     |         |                                   |   |                     |  |                                    |           |                     |   |                                   |  |  |           |  |   |       | 
| | Outstanding at the beginning of the year   |  |                     | 120,480 |                                   | $ | 9.96                |  |                                    | 454,811   |                     | $ | 3.54                              |  |  | 1,137,931 |  | $ | 8.06  | 
| | Granted                                    |  |                     | 334,331 |                                   | $ | 1.23                |  |                                    | 683,120   |                     | $ | 11.07                             |  |  | 359,228   |  | $ | 12.92 | 
| |                                            |  |                     |         |                                   |   |                     |  |                                    |           |                     |   |                                   |  |  |           |  |   |       | 
| |                                            |  |                     |         |                                   |   |                     |  |                                    |           |                     |   |                                   |  |  |           |  |   |       | 
| | Outstanding at the end of the year         |  |                     | 454,811 |                                   | $ | 3.54                |  |                                    | 1,137,931 |                     | $ | 8.06                              |  |  | 1,497,159 |  | $ | 9.23  | 
| |                                            |  |                     |         |                                   |   |                     |  |                                    |           |                     |   |                                   |  |  |           |  |   |       | 
| |                                            |  |                     |         |                                   |   |                     |  |                                    |           |                     |   |                                   |  |  |           |  |   |       | 
| | Options exercisable at the end of the year |  |                     | 454,811 |                                   | $ | 3.54                |  |                                    | 454,811   |                     | $ | 3.54                              |  |  | 454,811   |  | $ | 3.54  | 
| |                                            |  |                     |         |                                   |   |                     |  |                                    |           |                     |   |                                   |  |  |           |  |   |       | 

| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | The options
  outstanding as of December 31, 2005, have been separated into exercise price
  categories as follows:

| |  |                            |  |                                                  |         |                                         |      |                               |  |                                               |      |                                                   |   |         |         |      |      |  | 
| |  | -------------------------- |  | ------------------------------------------------ | ------- | --------------------------------------- | ---- | ----------------------------- |  | --------------------------------------------- | ---- | ------------------------------------------------- | - | ------- | ------- | ---- | ---- |  | 
| |  | Ranges of
  exercise price |  | Optionsoutstanding
  as of
  December 31,
  2005 |         | Weightedaverageremainingcontractuallife |      | Weighted averageexerciseprice |  | Optionsexercisableas of
  December 31,
  2005 |      | WeightedAverageExerciseprice ofExercisableOptions |  
| |  |                            |  |                                                  |         |                                         |      |                               |  |                                               |      |                                                   |  
| |  | $                          |  |                                                  |         | (Years)                                 |      | $                             |  |                                               |      |                                                   | $ |        
| |  |                            |  |                                                  |         |                                         |      |                               |  |                                               |      |                                                   |   |        
| |  |                            |  |                                                  |         |                                         |      |                               |  |                                               |      |                                                   |   |         |         |      |      |  | 
| |  | 0.00                       |  |                                                  | 167,226 |                                         | 7.75 |                               |  | 0.00                                          |      |                                                   |   | 167,226 |         | 0.00 |      | 
| |  | 2.46                       |  |                                                  | 167,105 |                                         | 7.75 |                               |  | 2.46                                          |      |                                                   |   | 167,105 |         | 2.46 |      | 
| |  | 9.96-12.43                 |  |                                                  | 998,048 |                                         | 5.33 |                               |  | 11.12                                         |      |                                                   |   | 120,480 |         | 9.96 |      | 
| |  | 14.00                      |  |                                                  | 164,780 |                                         | 5.65 |                               |  | 14.00                                         |      |                                                   |   | -       |         | -    |      | 
| |  |                            |  |                                                  |         |                                         |      |                               |  |                                               |      |                                                   |   |         |         |      |      |  | 
| |  |                            |  |                                                  |         |                                         |      |                               |  |                                               |      |                                                   |   |         |         |      |      |  | 
| |  |                            |  |                                                  |         | 1,497,159                               |      | 5.91                          |  |                                               | 9.23 |                                                   |   |         | 454,811 |      | 3.54 |  | 
| |  |                            |  |                                                  |         |                                         |      |                               |  |                                               |      |                                                   |   |         |         |      |      |  | 

F - 34

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |                              |                                                                                                                                                                                                
|----------- | ---------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13:   | SHAREHOLDERS EQUITY (Cont.)
|            |                              |                                                                                                                                                                                                
|            |                              | Weighted
  average fair values and weighted average exercise prices of options whose
  exercise price is equal to or lower than the fair value of the shares at date
  of grant are as follows:

| |                                        |  |                                                                       |      |                                                                          |   |      |  |      |      |      |   |      |  |   |       |  |   |       | 
| | -------------------------------------- |  | --------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------ | - | ---- |  | ---- | ---- | ---- | - | ---- |  | - | ----- |  | - | ----- | 
| |                                        |  | Year ended
  December 31,                                             |      | Year ended
  December 31,                                                |  
| |                                        |  |                                                                       |      |                                                                          |  
| |                                        |  | 2003                                                                  |      | 2004                                                                     |   | 2005 |  | 2003 |      | 2004 |   | 2005 | 
| |                                        |  |                                                                       |      |                                                                          |   |      |  |      |      |      |   |      | 
| |                                        |  | Weighted average fair value of
  options granted at an exercise price |      | Weighted average exercise price ofoptions
  granted at an exercise price |  
| |                                        |  |                                                                       |      |                                                                          |  
| | Equal to fair value at date of grant   |  | $                                                                     | -    |                                                                          | $ | 3.49 |  | $    | 3.70 |      | $ | -    |  | $ | 12.43 |  | $ | 11.55 | 
| |                                        |  |                                                                       |      |                                                                          |   |      |  |      |      |      |   |      |  |   |       |  |   |       | 
| | Lower than fair value at date of grant |  | $                                                                     | 5.50 |                                                                          | $ | 4.40 |  | $    | 5.13 |      | $ | 1.23 |  | $ | 10.30 |  | $ | 13.07 | 
| |                                        |  |                                                                       |      |                                                                          |   |      |  |      |      |      |   |      |  |   |       |  |   |       | 

|            |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | --------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                   | Compensation
  expenses were $ 1,809, $ 82 and $300 in the years ended December 31, 2003, 2004
  and 2005, respectively. The Company amortizes the compensation costs using
  the straight line method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | e.                                | SII share
  option plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                   | On June 8,
  2005, Shamir subsidiary SII, granted 90 options to acquire SIIs shares to
  certain officers of SII. Weighted average exercise price of $10,888, vesting-
  60% at grant date and 40% on January 1, 2006. The options contractual life
  was 10 years from the grant date. On December 29, 2005 the option grant was
  cancelled. Compensation expenses related to SII option plan were $ 308 in the
  year ended December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|NOTE 14:   | TRANSACTIONS WITH RELATED PARTIES
|            |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | a.                                | Manpower
  agreement with Kibbutz Shamir (the Kibbutz):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                   | In 1999, Shamir signed a manpower agreement with the Kibbutz, its
  principal shareholder, pursuant to which the Kibbutz supplies labor services
  at Shamirs request. Pursuant to the agreement, the Kibbutz claims that the
  services provided by it are provided in its capacity as a contractor and that
  an employee-employer relationship shall not apply between Shamir and the
  members of the Kibbutz who provide the services. The Kibbutz is solely
  responsible for the performance of all obligations applicable to an employer
  with respect to the persons through whom it supplies labor services to
  Shamir. On February 9, 2005, the Company entered into new agreement with the
  Kibbutz. Under the new agreement the fees to be paid will be substantially
  similar to the amounts paid under the prior agreement. Manpower service fees
  amounted to $ 1,619, $ 1,584 and $ 1,347 for the years ended December 31, 2003,
  2004 and 2005, respectively.
|            |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | b.                                | Service
  agreement with the Kibbutz:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                   | Shamir signed a service agreement with Kibbutz Shamir, pursuant to
  which the Kibbutz provides Shamir with services that include catering,
  security, laundry, switchboard and communications, maintenance, landscaping
  and trash removal, and payment of local authority taxes. On February 9, 2005,
  the Company entered into new agreement with the Kibbutz. Under the new
  agreement the fees to be paid will be substantially similar to the amounts
  paid under the prior agreement. Shamir paid the Kibbutz service fees
  amounting to $ 224, $ 246 and $ 248 for the years ended December 31, 2003, 2004
  and 2005, respectively.                                                                                                                                                                                                                                                                                                                                    

F - 35

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                          
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | ----------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14:   | TRANSACTIONS WITH RELATED PARTIES (Cont.)
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | c.                                        | Lease
  agreement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                           | Shamirs offices, manufacturing, and research and development
  facilities are located on the grounds of Kibbutz Shamir. The facilities are
  sub-leased from Kibbutz Shamir, which has a long-term lease on the property
  from the Israel Lands Administration (the ILA). On January 5, 1999,
  Shamir and the Kibbutz signed a sub-lease agreement pursuant to which the
  Kibbutz sub-leased to Shamir the facilities for a period of twenty years
  beginning on January 1, 1999. Rental payments amounted to $ 273, $ 294 and
  $ 292 for the years ended December 31, 2003, 2004 and 2005, respectively. On
  February 9, 2005, the Company entered into an amendment to sub-lease
  agreement. The term of the amended agreement is extended from 20 years to 24
  years and 22 months. Rental payments under the amended agreement are the same
  as under the prior agreement. The facilities are subleased from the Kibbutz,
  which has long term lease on the property from the ILA. The ILA may cancel
  the lease in certain circumstances, including if Kibbutz Shamir commences
  proceedings to disband or liquidate or in the event that Kibbutz Shamir
  ceases to be a kibbutz.
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                           | On August 8,
  2005, a special general meetings of shareholders approved the entry of Shamir or one of its
  subsidiaries into a lease agreement with the Kibbutz, for a period commencing
  upon the completion of the construction of the new building and ending not
  later than 24 years and 11 month thereafter. The building construction is not
  complete yet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | d.                                        | Loan to
  Kibbutz Shamir:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                           | In
  accordance with the sublease agreement with the Kibbutz, Shamir granted a
  loan of $ 370 to Kibbutz Shamir in several installments in 2004 in order to
  fund the construction of an extension to Shamirs premises in Kibbutz Shamir.
  The loan is to be repaid in quarterly equal installments over a period of
  four years commencing March 31, 2005 through deductions of the rental fees
  Shamir pay the Kibbutz. The loan bears interest at 1.5% per year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                           | On August 8,
  2005, a special general meeting of shareholders approved the grant of a loan
  to the Kibbutz in an amount of up-to $ 4,400, which will bear an annual dollar
  interest at a variable rate equal to annual LIBOR plus 1.5%. The loan is to
  provide the Kibbutz with funds for the construction of a building on the
  Kibbutzs territory. The building is designated for the expansion of the
  companys production facilities. The loan will be repaid in semi-annual
  installments in an amount equal to the semi-annual rental fees to be paid by
  Shamir to the Kibbutz pursuant to the lease agreement. Up until December 31, 2005 the Company
  extended to the Kibbutz an amount of $136 on account of this loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | e.                                        | Consultancy
  services:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                           | One of Shamirs shareholders provides Shamir with consultancy
  services. Consultancy fees amounted to $ 73, $ 0 and $ 0 for the years ended
  December 31, 2003, 2004 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F - 36

---

---



|                                                  
|--------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

|            |                                          
|----------- | -----------------------------------------
|NOTE 15:   | MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION

| |    |                                                                                                                                                                                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | The Group manages its business on the basis of one reportable
  segment. The data is presented in accordance with SFAS No. 131, Disclosure
  about Segments of an Enterprise and Related Information. Total revenues are
  attributed to geographic areas based on the location of end customers.
| |    |                                                                                                                                                                                                                                                                                                    
| |    | The
  following present total revenues and long-lived assets for the years ended
  December 31, 2003, 2004 and 2005 and as of December 31, 2003, 2004 and 2005,
  respectively:                                                                                                                    

| |               |  |                  |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |        | 
| | ------------- |  | ---------------- | ------ | ------------------- | - | ---------------- |  | ------------------- | ------ | ---------------- | - | ------------------- |  | - | ------ |  | - | ------ | 
| |               |  | 2003             |        | 2004                |   | 2005             | 
| |               |  |                  |        |                     |   |                  | 
| |               |  | Total
  revenues |        | Long-lived
  assets |   | Total
  revenues |  | Long-lived
  assets |        | Total
  revenues |   | Long-lived
  assets | 
| |               |  |                  |        |                     |   |                  |  |                     |        |                  |   |                     | 
| |               |  |                  |        |                     |   |                  |  |                     |        |                  |   |                     | 
| | Israel        |  | $                | 906    |                     | $ | 11,068           |  | $                   | 845    |                  | $ | 11,172              |  | $ | 787    |  | $ | 11,293 | 
| | United States |  |                  | 19,808 |                     |   | 352              |  |                     | 21,938 |                  |   | 484                 |  |   | 26,047 |  |   | 4,668  | 
| | Europe        |  |                  | 36,507 |                     |   | 5,386            |  |                     | 44,477 |                  |   | 9,296               |  |   | 46,404 |  |   | 13,887 | 
| | Asia          |  |                  | 2,184  |                     |   | -                |  |                     | 2,454  |                  |   | -                   |  |   | 4,099  |  |   | -      | 
| | Others        |  |                  | 674    |                     |   | -                |  |                     | 1,555  |                  |   | -                   |  |   | 3,027  |  |   | -      | 
| |               |  |                  |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |        | 
| |               |  |                  |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |        | 
| |               |  | $                | 60,079 |                     | $ | 16,806           |  | $                   | 71,269 |                  | $ | 20,952              |  | $ | 80,364 |  | $ | 29,848 | 
| |               |  |                  |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |        |  |   |        | 

| |    |                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------
| | b. | Product
  lines:                                                                                            
| |    |                                                                                                             
| |    | Total
  revenues from external customers divided on the basis of the Groups product
  lines are as follows:

| |                   |  |                         |        |      |   |        |  |   |        | 
| | ----------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
| |                   |  | Year ended December 31, |       
| |                   |  |                         |       
| |                   |  | 2003                    |        | 2004 |   | 2005   | 
| |                   |  |                         |        |      |   |        | 
|
| | Lenses            |  | $                       | 52,767 |      | $ | 64,282 |  | $ | 72,520 | 
| | Design
  services |  |                         | 7,312  |      |   | 6,987  |  |   | 7,844  | 
| |                   |  |                         |        |      |   |        |  |   |        | 
|
| |                   |  | $                       | 60,079 |      | $ | 71,269 |  | $ | 80,364 | 
| |                   |  |                         |        |      |   |        |  |   |        | 

| |    |                                                       
| | -- | ------------------------------------------------------
| | c. | Major customer data as a percentage of total revenues:

| |            |  |  |    |   |  |   |   |  |   |  
| | ---------- |  |  | -- | - |  | - | - |  | - | -
| | Customer A |  |  | 11 | % |  | 6 | % |  | 5 | %
| |            |  |  |    |   |  |   |   |  |   |  

F - 37

---

---



|                                                  
|--------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                  
|U.S. dollars in thousands                         

|            |                                                    
|----------- | ---------------------------------------------------
|NOTE 16:   | SUPPLEMENTARY DATA ON SELECTED STATEMENTS OF INCOME

| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| | -- | --------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
| |    |                                                                             |  | Year ended December 31, |       
| |    |                                                                             |  |                         |       
| |    |                                                                             |  | 2003                    |        | 2004 |   | 2005   |  
| |    |                                                                             |  |                         |        |      |   |        |  
| |    |                                                                             |  |                         |        |      |   |        |  
| | a. | Financial income (expenses)
  and other, net                                |  |                         |        |      |   |        |   |   |        |  
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| |    | Financial expenses:                                                         |  |                         |        |      |   |        |   |   |        |  
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| |    | Interest in respect of
  long-term loans                                    |  | $                       | (762   | )    | $ | (632   | ) | $ | (431   | )
| |    | Interest in respect of
  short-term loans                                   |  |                         | (330   | )    |   | (340   | ) |   | (355   | )
| |    | Changes in derivatives fair
  value                                         |  |                         | -      |      |   | (36    | ) |   | -      |  
| |    | Foreign currency
  translation, net                                         |  |                         | (121   | )    |   | -      |   |   | -      |  
| |    | Other                                                                       |  |                         | -      |      |   | (440   | ) |   | (393   | )
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| |    |                                                                             |  |                         | (1,213 | )    |   | (1,448 | ) |   | (1,179 | )
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| |    | Financial income:                                                           |  |                         |        |      |   |        |   |   |        |  
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| |    | Income in respect of loans
  to related parties                             |  |                         | 94     |      |   | 39     |   |   | 25     |  
| |    | Income in respect of cash
  and cash equivalents and short-term investments |  |                         | -      |      |   | -      |   |   | 1,053  |  
| |    | Changes in derivatives fair
  value                                         |  |                         | -      |      |   | -      |   |   | 251    |  
| |    | Foreign currency
  translation, net                                         |  |                         | -      |      |   | 229    |   |   | 100    |  
| |    | Other                                                                       |  |                         | 55     |      |   | -      |   |   | 18     |  
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| |    |                                                                             |  |                         | 149    |      |   | 268    |   |   | 1,447  |  
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| |    | Other income                                                                |  |                         | -      |      |   | 316    |   |   | 133    |  
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  
| |    | Financial income (expenses)
  and other, net                                |  | $                       | (1,064 | )    | $ | (864   | ) | $ | 401    |  
| |    |                                                                             |  |                         |        |      |   |        |   |   |        |  

F - 38

---

---



|                                                           
|-----------------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD AND ITS
  SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |                                                            
|----------- | -----------------------------------------------------------
|NOTE 16:   | SUPPLEMENTARY DATA ON SELECTED STATEMENTS OF INCOME (Cont.)

| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| | -- | ----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
| | b. | Net earnings
  per share:                                                                       |                                                                                     |  |                         |        |      |   |       
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |       
| |    | The
  following table sets forth the computation of basic and diluted net earnings
  per share:
| |    |                                                                                                 |                                                                                     |  |                         |       
| |    |                                                                                                 |                                                                                     |  | Year ended December 31, |       
| |    |                                                                                                 |                                                                                     |  |                         |       
| |    |                                                                                                 |                                                                                     |  | 2003                    |        | 2004 |   | 2005   | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        | 
| |    | 1.                                                                                              | Numerator:                                                                          |  |                         |       
|
| |    |                                                                                                 | Numerator for basic and diluted net
  earnings per share -                          |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 | Net income available to shareholders                                                |  | $                       | 5,237  |      | $ | 8,812  |  | $ | 8,105  | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    | 2.                                                                                              | Denominator (in thousands):                                                         |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 | Denominator for basic net earnings per
  share -                                    |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 | Weighted average shares - Shareholders
  equity                                    |  |                         | 12,048 |      |   | 12,129 |  |   | 15,360 | 
| |    |                                                                                                 | Weighted average shares - Temporary equity                                          |  |                         | -      |      |   | 496    |  |   | 89     | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 | Weighted average number of shares                                                   |  |                         | 12,048 |      |   | 12,625 |  |   | 15,449 | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 | Effect of dilutive securities:                                                      |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 | Add - Call option                                                                   |  |                         | 16     |      |   | 4      |  |   | -      | 
| |    |                                                                                                 | Add - Employee stock options                                                        |  |                         | 69     |      |   | 332    |  |   | 420    | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 |                                                                                     |  |                         | 85     |      |   | 336    |  |   | 420    | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                                 | Denominator for diluted net earnings per
  share - adjusted weighted average shares |  |                         | 12,133 |      |   | 12,961 |  |   | 15,869 | 
| |    |                                                                                                 |                                                                                     |  |                         |        |      |   |        |  |   |        | 

| |    |                                                                                                                                          |  |                         |       |      |   |       |   |   |       |  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | -
| | c. | Inventory
  provision:                                                                                                                   |  |                         |       |      |   |       |   |   |       |  
| |    |                                                                                                                                          |  |                         |       |      |   |       |   |   |       |  
| |    | The change
  in the inventory provision for slow-moving inventory for the years ended
  December 31, 2003, 2004 and 2005 are as follows:
| |    |                                                                                                                                          |  | Year ended December 31, |       |     
| |    |                                                                                                                                          |  |                         |       |     
| |    |                                                                                                                                          |  | 2003                    |       | 2004 |   | 2005  |   |  
| |    |                                                                                                                                          |  |                         |       |      |   |       |   |  
|
| |    | Balance at the beginning of the year                                                                                                     |  | $                       | 836   |      | $ | 1,249 |   | $ | 1,159 |  
| |    | Inventory provision                                                                                                                      |  |                         | 289   |      |   | (135  | ) |   | 9     |  
| |    | Inventory written-off                                                                                                                    |  |                         | -     |      |   | -     |   |   | (49   | )
| |    | Foreign currency translation adjustment                                                                                                  |  |                         | 124   |      |   | 45    |   |   | (83   | )
| |    |                                                                                                                                          |  |                         |       |      |   |       |   |   |       |  
| |    |                                                                                                                                          |  |                         |       |      |   |       |   |   |       |  
| |    | Balance at the end of the year                                                                                                           |  | $                       | 1,249 |      | $ | 1,159 |   | $ | 1,036 |  
| |    |                                                                                                                                          |  |                         |       |      |   |       |   |   |       |  

F - 39

---

---



SHAMIR OPTICAL INDUSTRY LTD AND ITS
SUBSIDIARIES

|                                                           
|-----------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|            |                                                            
|----------- | -----------------------------------------------------------
|NOTE 16:   | SUPPLEMENTARY DATA ON SELECTED STATEMENTS OF INCOME (Cont.)

| |    |                                                                                                                           
| | -- | --------------------------------------------------------------------------------------------------------------------------
| | d. | Provision
  for doubtful accounts:                                                                                        
|
| |    | The change
  in the provision for doubtful accounts for the years ended December 31, 2003,
  2004 and 2005 are as follows:

| |                                         |  |                         |      |      |   |      |   |   |      |   | 
| | --------------------------------------- |  | ----------------------- | ---- | ---- | - | ---- | - | - | ---- | - | 
| |                                         |  | Year ended December 31, |      |     
| |                                         |  |                         |      |     
| |                                         |  | 2003                    |      | 2004 |   | 2005 |   |  
| |                                         |  |                         |      |      |   |      |   |  
| |                                         |  |                         |      |      |   |      |   |   |      |   | 
| | Balance at the beginning of the
  year  |  | $                       | 541  |      | $ | 450  |   | $ | 533  |   | 
| | Doubtful accounts provision             |  |                         | 76   |      |   | 51   |   |   | 261  |   | 
| | Bad-debts written-off                   |  |                         | (242 | )    |   | (1   | ) |   | (245 | ) | 
| | Foreign currency translation adjustment |  |                         | 75   |      |   | 33   |   |   | (75  | ) | 
| |                                         |  |                         |      |      |   |      |   |   |      |   | 
| |                                         |  |                         |      |      |   |      |   |   |      |   | 
| | Balance at the end of the year          |  | $                       | 450  |      | $ | 533  |   | $ | 474  |   | 
| |                                         |  |                         |      |      |   |      |   |   |      |   | 

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 17:   | SUBSEQUENT
  EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | On January 2, 2006, Shamir completed the
  acquisition of 51% of the ownership interests in Spherical Optics (PTY) Ltd.,
  Shamir lenses distributor in South Africa. The purchase price amounted to
  approximately $ 850.                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | In addition, on June 8, 2006, one of the
  groups customer filed a complaint in order to avoid and recover preferential
  transfers due to Shamir USA, which was required to respond to this complaint
  within 30 days. The payment amount in question that was received during the
  Preferential Period (March 25, 2004 through June 22, 2004) is estimated as
  $ 347. The Group cannot predict yet the outcome of the claim nor can it make
  any estimate of the amount of damages, if held responsible.

F - 40

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# EXHIBIT INDEX

|Exhibit Number |  | Description
|-------------- |  | -----------

|3.1 |  | Articles
of Association of Shamir.*
|--- |  | -----------------------------------

|5.1 |  | Opinion
of M. Seligman & Co. as to the validity of the shares.*
|--- |  | ---------------------------------------------------------------

|10.1 |  | Lease
agreement between Kibbutz Eyal and Eyal Optical Industries (1995) Ltd.*
|---- |  | -----------------------------------------------------------------------------

|10.2 |  | Working
services agreement between Shamir and Kibbutz Shamir.*
|---- |  | --------------------------------------------------------------

|10.3 |  | Service
agreement between Shamir and Kibbutz Shamir.*
|---- |  | -----------------------------------------------------

|10.4 |  | Lease
agreement between Kibbutz Shamir and the Israel Lands Administration.*
|---- |  | ----------------------------------------------------------------------------

|10.5 |  | Sublease
agreement between Shamir and Kibbutz Shamir, including amendment.*
|---- |  | ---------------------------------------------------------------------------

|10.6 |  | Loan
agreement between Shamir and Kibbutz Shamir.*
|---- |  | --------------------------------------------------

|10.7 |  | Shareholders'
agreement among the shareholders of Shamir.*
|---- |  | ----------------------------------------------------------

|10.8 |  | Registration
rights agreement between Shamir and certain of its shareholders.*
|---- |  | ------------------------------------------------------------------------------

|11 |  | Code
of Ethics of Shamir **
|-- |  | ---------------------------

|12.1 |  | Certification
of the Chief Executive Officer pursuant toss.302 of the Sarbanes-Oxley Act of 2002
|---- |  | ------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of the Chief Financial Officer pursuant toss.302 of the Sarbanes-Oxley Act of 2002
|---- |  | ------------------------------------------------------------------------------------------------

|13 |  | Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section
1350,               as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21 |  | Subsidiaries
of Shamir.*
|-- |  | ------------------------

*     Incorporated
by reference to our registration statement on Form F-1 filed with the SEC on February 11,
2005, as amended on March 8, 2005.

**     Incorporated
by reference to our annual report on Form 20-F Filed with the SEC on June 28, 2006.



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