|As filed with the Securities and Exchange Commission on June 26, 2007
|---------------------------------------------------------------------

|
|

# 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 on December 31, 2006

# OR

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

# For the transition
period from ____________ to

|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:
|Ordinary shares, par value NIS 0.01 each | NASDAQ Global Market                      

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

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

Indicate
the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: 16,256,514 Ordinary
Shares, 0.01 NIS par value each

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

Yes o No 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 o No 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 x No 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 o No x



---

---

# TABLE OF CONTENTS

|                           |                                                                                       |   
|-------------------------- | ------------------------------------------------------------------------------------- | --
|
|
|
|
|CERTAIN DEFINED TERMS      | iii                                                                                  
|                          
|FORWARD-LOOKING STATEMENTS | iii                                                                                  
|                          
|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 4A. UNRESOLVED STAFF COMMENTS                                                    | 26
|                           | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                  | 27
|                           | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    | 38
|                           | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                             | 45
|                           | ITEM 8. FINANCIAL INFORMATION                                                         | 51
|                           | ITEM 9. THE LISTING                                                                   | 52
|                           | ITEM 10. ADDITIONAL INFORMATION                                                       | 53
|                           | ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 64
|                           | 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                                      | 66
|                           | 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



---

---



# 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, Shamir Nano, Piccolo Nano, Autograph
Nano, Studio,  Shamir Smart Office, Shamir Smart Attitude,
Shamir Smart Single Vision, Shamir Freeform Geometry, Shamir Freeform
Cosmetics. Our main trademarks are registered or are in the process of being
registered in the U.S., 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

---

---

# 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

In
March 2005, we conducted an initial public offering (IPO) and concurrent
listing on the NASDAQ National Market (currently known as NASDAQ Global Market) of our
ordinary shares. Our ordinary shares have also been listed on the Tel Aviv Stock Exchange
since May 2, 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
corporation, 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.

On
March 6, 2005, we changed the structure of our company from an A.C.S. into an Israeli
corporation. 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
corporation, 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 ordinary 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
ordinary 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 ordinary
shares with a par value of NIS 0.01 each. We also created authorized share capital of
100,000,000 ordinary shares with a par value of NIS 0.01 each. As part of the IPO, which
closed on March 16, 2005, we issued 3,400,000 new ordinary shares with a par value of NIS
0.01 each. In addition on July 31, 2005, we allocated 145,182 ordinary shares to Severn
Confirmers & Forwarders, Ltd. As of the date of this annual report we have 16,256,514
ordinary shares outstanding. See also Item 10. Additional InformationShare
Capital.

# 3.A SELECTED FINANCIAL
DATA

We
prepare our consolidated financial statements in accordance with accounting principles
generally accepted in the U.S. (U.S. GAAP). The following data has been derived from our
audited consolidated financial statements as of and for the five years ended December 31,
2002, 2003, 2004, 2005 and 2006, 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, 2005 and
2006, and the related audited consolidated statements of income and of cash flows for each
of the three years ended December 31, 2004, 2005 and 2006, together with the notes
thereto, appear elsewhere in this annual report.

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.

1

---

---

|                                                       | Year Ended December 31,
|------------------------------------------------------ | -----------------------
|
|
|
|
|(Dollars in thousands, except per share data)          |                        
|                                                       |                        
|STATEMENT OF OPERATIONS DATA:                          |                        
|Revenues, net                                          |                        
|Cost of revenues                                       |                        
|                                                       |                        
|Gross profit                                           |                        
|                                                       |                        
|Operating expenses:                                    |                        
|Research and development(1)                            |                        
|Selling and marketing(1)                               |                        
|General and administrative(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 (in thousands)       |                        
|Basic                                                  |                        
|Diluted                                                |                        
|Weighted average shares used for pro forma (in         |                        
|thousands) (2) :                                       |                        
|Basic                                                  |                        
|Diluted                                                |                        

|                           | 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) | Operating
expenses includes the following stock-based compensation:
|--- | -------------------------------------------------------------------

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

2

---

---

| | (2) | The
pro forma adjustments give effect to our reorganization into an Israeli
               corporation (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 ordinary 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 an
Israeli corporation 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 an Israeli corporation.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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 | 2002 | 2003 | 2004 | 2005  | 2006
| | -------- | ---- | ---- | ---- | ----- | ----
|
|
|
|
| | EUR      |      |      |      | 1.025 |     
| | NIS      |      |      |      | 4.738 |     

On
June 15, 2007 the exchange rate was NIS 4.175 per $1.00 and 0.751 per $1.00, as
reported by the Bank of Israel.

# 3.B CAPITALIZATION AND
INDEBTEDNESS

Not applicable

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

Not applicable.

# 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.

3

---

---

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 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 additional
laboratory, or (iv) laboratories owned by our competitors cease to purchase our products.

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 substantial revenues from sales outside of Israel, and a significant majority from
sales outside of Israel and the United States. During 2006 we generated approximately
68.2% of our revenues from sales outside of Israel and the United States, including 52.2%
in Europe. We also sell our products in Australia, Canada, South Africa, South America,
China and several additional countries. 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 U.S. dollar and the NIS, and the U.S. dollar
and the Euro;
|- | -------------------------------------------------------------------------------------------------------------

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

4

---

---

| | 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
maybe come 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.

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 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. We have insured the portion of our
product inventories stored in these 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.

5

---

---

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 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 such breaches. 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.

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 are increasing numbers 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 that is
focused on research and development, and we cannot assure 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
are focused 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 developmental success or investment
return.

6

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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.

We intend to continue our
policies of acquisitions and of co-operations 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 local co-operations and acquire complementary businesses or
technologies. Negotiating potential acquisitions or local co-operations 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 local
co-operations or that we will be able to realize the intended sales and cost benefits of
the acquisition or local co-operations.

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. The consent of certain minorities in certain subsidiaries
is required for certain matters regarding the subsidiaries 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.

7

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We
have an exclusive arrangement with Altra Trading GmbH (Altra), a distributor
in Europe of which we own 51%, and with Shamir Insight, Inc. (Shamir Insight),
a distributor in the United States of which we own 90% as of the date of this annual
report. Sales in Europe through Altra and in the United States through Shamir Insight
accounted for approximately 78.8% of our total sales in 2006. 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.

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.

8

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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-Zeev, and our Chief Technology Officer & Vice President of R&D, 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 we may be unable to replace them 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
translationeffects resulting from fluctuations in currency exchange rates. We
generate our revenues primarily in Euros and U.S. dollars, and we incur a significant
portion of our expenses, principally salaries and related expenses of our staff in Israel,
in NIS. In 2006 we generated approximately 42% of our revenues in dollars and 53% in
Euros, and we incurred approximately 21% of our expenses in NIS, 23% in dollars and 52% in
Euros. Exchange rate fluctuations between the dollar and the Euro may 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.

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 U.S. 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.

In
accordance with current Securities and Exchange Committee guidelines, we are classified as
a non-accelerated filer and are required to submit our first assessment of internal
control over financial reporting with our December 31, 2007, financial statements. 
Commencing on December 31, 2008, our external auditor will be providing an opinion on the
effectiveness of our internal controls. We have begun the process of determining whether
our existing internal controls over our financial reporting systems are compliant with
Section 404 of the Sarbanes Oxley Act (Section 404).  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 processes. 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, our operations, financial
reporting or financial results may be adversely affected, and it could result in our being
unable to obtain an unqualified report on internal controls from our independent
registered public accounting firm.

9

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# Risks Related to Our
Relationship with Kibbutz Shamir

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

As
of June 15, 2007, our majority shareholder, Kibbutz Shamir, holds approximately 59.6% 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, we have entered into certain agreements with Kibbutz Shamir pursuant to which
Kibbutz Shamir provides us with, among other things, 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. For more information please see Item 7. Certain Relationships 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. In addition, we have entered into certain
agreements with Kibbutz Shamir pursuant to which Kibbutz Shamir provides us with the
certain services mentioned above. 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.

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 president and chief
executive officer, and two other executive officers are members of Kibbutz Shamir and
members of Kibbutz Shamirs management board. Our chairman of the board of directors
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 ordinary shares;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

10

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| | 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 Global 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 ordinary
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.

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 ordinary
shares in March 2005, hold approximately 73% of our outstanding shares as of June 15,
2007. 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 our acquisition 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.

11

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# Risks Relating to Our
Operations in Israel

Conducting business in
Israel entails special risks.

Our
headquarters and main research and development, and part of our 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.
Most recently, in the summer of 2006, for approximately one month, battles took place
between the Israeli military and Lebanese guerilla units, and our northern facilities
suffered certain damages for which we were not fully reimbursed. 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.

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 45 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 general, 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
or 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.

12

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# 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
Optical Industries (1995) Ltd., or 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, 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 the Cambridge Optical Group, an optical laboratory in the United
Kingdom.

In
March 2005, we conducted an IPO and concurrent listing on the NASDAQ National Market
(currently known as NASDAQ Global Market) of our ordinary shares. Our ordinary shares have
also been listed on the Tel Aviv Stock Exchange since May 2, 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 corporation, 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.

On
March 6, 2005, we changed the structure of our company from an A.C.S. into an Israeli
corporation. 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
corporation, which is not considered as a taxable event.

On
June 27, 2005, Altra 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.

On
September 30, 2005, we completed the purchase of an additional 31.3% stake in Shamir
Insight 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 in France, Shamir France S.A.R.L., in order to
establish and operate a laboratory, sales and distribution platform.

In
December 2005, we established a subsidiary in Kibbutz Shamir, Israel, Shamir Special
Optical Products Ltd. (SSOP), which manufactures and develops 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, SSOP 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.

On
July 2, 2006, we purchased the remaining holdings of the outstanding shares in our R&D
Israeli based subsidiary Shamir Or Ltd. following which we are the sole shareholder of
Shamir Or Ltd.

On
August 15, 2006, we purchased 26% in Centro Integral Optico S.A. de C.V., a local
laboratory and distributor in Mexico. In addition, On November 1st, 2006, we
established a distribution company with local strategic partners, Shalens S.A. de C.V.

In
January 2007, we finalized a purchase of 25.8% in Siam Optical Technology Company Ltd.,
through which we operate a local laboratory in Thailand and 70% of its local subsidiary,
K.T Optic Company Limited.

Our
main office and production facilities are located at Kibbutz Shamir, Upper Galilee, 12135
Israel. Our telephone number at our main office is +972 (4) 6947810.

13

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# 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 sell
finished lenses (stock and prescriptions) to opticians, and utilize our capabilities to
provide design services to optical lens manufacturers under service, 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, Shamir Autograph, Shamir Creation
and Shamir Attitude.

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

The
global ophthalmic retail market consists of various segments, including frames, spectacle
lenses, contact lenses and optical accessories. The spectacle lens segment makes up the
largest portion of this market. 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.

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

| | 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. Progressive lenses are generally
the most expensive type of lenses and are less frequently covered by insurance than
single vision or bifocal lenses. 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.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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.

Market Growth

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

| | Favorable
Demographic Trends. Multifocal lenses, which include bifocal and progressive lenses,
are currently the most 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. We expect that the U.S. population
over the age of 45 will grow.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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 well 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.

15

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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, Zeiss (merged with Sola), Hoya and Rodenstock 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
Germany, 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 2006. We also believe that 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

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.

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. 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, Shamir Creation, optician
cosmetic fit for the newest line of frames, Shamir Attitude, lenses especially designed
for wrap around frames, and Shamir Autograph, which is based on our Direct Lens Technology
to allow greater customization of the lens.

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, via Altra, accounted for $53.3 million, or 54.8%, of our
revenues in 2006, and sales in the United States, via Shamir Insight, accounted for $23.3
million, or 24.0% during the same period.

16

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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 large customer base made up of more than 300
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 $8.7 million in 2003 to
approximately $23.3 million in 2006, representing a compound annual growth rate of
38.8%.

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 Freeform 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 Freeform 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 and
Dedicated Workforce and Management Team

Kibbutz
Shamir is our largest shareholder and holds 59.6% of our outstanding shares as of June 15,
2007. Kibbutz Shamir was founded in 1944 and is a small communal society of approximately
300 members, including approximately 43 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 located in Kibbutz
Shamir, including Shalag Industries Ltd., a company that is listed on the Tel Aviv Stock
Exchange.

Led
by Giora Ben-Zeev, 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 the chairman of the board, and an additional two executive officers,
are members of the management board of Kibbutz Shamir.

# 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.

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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 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, 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 Freeform production method. Our Freeform 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 Freeform Technology
to be material in the near future, we believe that over time Freeform 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.

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 opticians, and design
services, including molds, which we sell to optical lens manufacturers under service and
royalty agreements. During the year 2006, revenues from our sales of lenses accounted for
92.9% of our total revenues, while revenues from our sales of design services and others
accounted for 7.1% of our total revenues.

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Lenses

Premium
Lenses. According to market data current as of June 15, 2007, 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            
| | ---------------- | ------------------------------------------------------------------------------------------------------------ | -------------------------------
|
|
|
|
| | Shamir Genesis   | All-purpose progressive lens                                                                                 | Plastic, Mineral, Trivex       
| |                 
| | Shamir Office    | Designed for visual clarity from 1.3 ft. to 10 ft. Allows comfort for people working in closed environments. | Plastic, Mineral               
| |                 
| | Shamir Piccolo   | Designed to fit into any small frame.                                                                        | Plastic, Mineral, Polycarbonate
| |                 
| | 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 Freeform Technology.                                | Plastic Polycarbonate          
| |                  |                                                                                                              |                                

Freeform
Lenses. In addition to our premium lens offerings described above, we also produce
lenses under the Shamir Autograph brand using our new proprietary Freeform 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.

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, formerly 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 41 engineers, mathematicians,
physicists, chemists, programmers and optical technicians, is considered one of the
worlds preeminent 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.

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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 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 mold 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.

Direct
Lens Technology. Direct Lens Technology is our Freeform 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.

# 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.

20

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Lenses

Our
marketing strategy in the United States differs from our 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 their patients 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 300 independent laboratories have joined into a special
marketing effort urging customers 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.

Europe.           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. Recently, we established similar relationships by purchasing approximately
26% of the holdings in local laboratories and distributors in Thailand and in Mexico. 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 our research and development teams and 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.

21

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# Customers

Our
customers are optical laboratories and opticians for spectacle lenses and third-party lens
manufacturers for design services. During 2006 our two largest customers accounted for
13.7% of our revenues. Our largest customer accounted for approximately 8.0% of our
revenues during 2006. The remaining 86.3% of our revenues are spread across a large number
of customers in various geographic locations, and no other customer, other than our two
largest customers, accounted for more than 5.0% 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. Recently, our new laboratory in Kibbutz Shamir has begun to
manufacture finished lenses.

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. 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 Freeform Technology

Freeform
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 Freeform 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 Freeform 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.

22

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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.

Freeform Production of
Glass Molds

In
addition to the traditional production methods described above, we have begun to use our
Freeform production method for our internal glass molds production process. In this
Freeform 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 Freeform grinding machine. This
process creates the needed surface topography. We then polish the lens with dedicated
computer-controlled Freeform 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.

Freeform lens calculation
Software, writing and distributing

Our
software team which is part of the R&D team is writing a Freeform lens calculation
software that computes a surface for processing a Freeform lens. The software gets as an
input the prescription of lens as ordered by the optometrist as well as the frame shape
that the customer selected. The software computes a file that represents the surface that
needs to be formed on the lens and transfer it to a Freeform manufacturing line. A lens
having the exact prescription and optimal optical and geometrical characteristics is
produced by the Freeform line, using this file. We installed and keep installing this
software at our customers facilities and we get paid based on usage of the software which
is monitored and reported by the software.

# 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, 2006, we hold five patents and four patent application
directly, and five patents through our subsidiary Inray Ltd., covering various
aspects of our innovative algorithms, devices, 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, Shamir Smart Office, Shamir Smart
Attitude, Shamir Smart Single Vision, Shamir Freeform Geometry, Shamir
Freeform Cosmetics. 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. For example, 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.

23

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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.

# 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.

Shamir Optical Industry LTD. Kibbutz Shamir, Israel Eyal Optical Ind. Ltd. K. Eyal, Is. 100% Shamir Special Optical Products Ltd. K. Shamir, Is. 100% Spherical Optics (Pty) Ltd. Joh., South Africa 51% Shamir USA Agora Hills, CA 100% e-Vision LLC Roanoke, VA 17.86% Siam Optical Technology Company Ltd. Bangkok, Thailand 25.8% Inray Ltd. K. Shamir, Is. (2) 50% Altra Trading GmbH Niederau, Ger. 51% Shamir Insight, Inc. San Diego, CA (1) 90% Shamir UK LimitedCambridge, UK 100% Shamir Portugal, LDA Vilar, Portugal 100% Shamir Optical Espana, SL Madrid,  Spain 100% Interoptic SARL Paris, France 100% Altra Optik Sanayi ve Ticaret A.S. Istanbul, Turkey 100% Shamir France SARL Paris, France 100% Shamir Einit Ltd. Neve Ilan, Israel 50% Shamir Or Ltd. Rechovot, Is. 100% Centro Integral Optico S.A. de C.V. Mexico City, Mex. 26% Shalens S.A. C.V. Mexico City, Mex. 26%


---

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

|(2) | Shamir
has a 50.03% ownership interest and holds 50% of the voting rights in
               Inray Ltd. We are currently negotiating with our fellow shareholders in
order to                purchase the entire holdings in Inray.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 through Eyal Optical Holdings A.C.S. Ltd.
(48.15%) and directly (51.85%).
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shamir
Or Ltd. is a research and development company.
|- | -----------------------------------------------------

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

| | Shamir
Insight, Inc. is our main marketing and distribution company in the U.S.
|- | -------------------------------------------------------------------------------

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

| | Inray
Ltd. is a research and development company jointly owned by us, the Technion Israel
Institute of Technology and two of its researchers. We are currently negotiating with our
fellow shareholders to fully purchase the holdings in Inray.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e-Vision,
LLC, through its partly owned subsidiary PixelOptics, Inc., 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
S.A.R.L. is one of our distributors in France.
|- | ---------------------------------------------------------

| | Shamir
Optical Espana, S.L. is our distributor in Spain.
|- | --------------------------------------------------------

| | Altra
Optik Sanayi ve Ticaret A.S. is our laboratory facility and distributor in Turkey.
|- | ----------------------------------------------------------------------------------------

| | Shamir
France S.A.R.L. is one of our distributors in France.
|- | ------------------------------------------------------------

24

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| | Spherical
Optics (PTY) Ltd. is our local distributor in South Africa.
|- | ---------------------------------------------------------------------

| | Shamir
Portugal, LDA. is our optical laboratory and distributor in Portugal, which also serves
our European      subsidiaries.
|- | ------------------------------------------------------------------------------------------------------------------------------

| | Shamir
UK Limited is our optical laboratory and distributor in the United Kingdom.
|- | ----------------------------------------------------------------------------------

| | Shamir
Special Optical Products Ltd. manufactures and develops polycarbonate and finished lenses
in the new      factory we are building in Kibbutz Shamir.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shamir
Einit Ltd. is our local distributor to the Israeli market and is owned equally by SSOP
and Einit Ltd.
|- | ------------------------------------------------------------------------------------------------------------

| | Centro
Integral Optico S.A. de C.V. ("CIO") is a laboratory and one of our distributors in
Mexico.
|- | --------------------------------------------------------------------------------------------------

| | Shalens
S.A. de C.V. ("Shalens") is one of our distributors in Mexico.
|- | ----------------------------------------------------------------------

| | Siam
Optical technology Company Ltd., through which we operate a local laboratory in Thailand
and 70% of its  local subsidiary, K.T Optic Company
Limited.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

# 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 8,672 square meters of
manufacturing, warehouses and office space.

We
also own optical laboratories in Portugal, Turkey and the United Kingdom, which occupy
approximately 2,000 square meters, 1,496 square meters and 1,001 square meters of owned
and leased manufacturing and office space, respectively. 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.

25

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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; Administration; Manufacturing | 4,786 | Leased      
|                          
|Kibbutz Eyal, Israel       | Eyal Optical Industries (95) Ltd.    | Administration; Manufacturing               | 3,560 | Leased      
|                          
|Kibbutz Shamir, Israel     | Shamir Special Optical Products Ltd. | Administration                              | 188   | Leased      
|                          
|Jerusalem, Israel          | Shamir Einit Ltd.                    | Administration; Distribution warehouse      | 138   | Leased      
|                          
|Vilar, Portugal            | Shamir Portugal, LDA                 | Optical laboratory                          | 2,000 | Owned       
|                          
|Madrid, Spain              | Shamir Optical Espana S.L.           | Distribution warehouse                      | 320   | Leased      
|                          
|Barcelona, Spain           | Shamir Optical Espana S.L.           | Distribution warehouse                      | 150   | Leased      
|                          
|Paris, France              | Shamir France S.A.R.L.               | Distribution warehouse                      | 5,782 | Leased      
|                          
|Paris, France              | Interoptic S.A.R.L.                  | Distribution warehouse                      | 250   | Leased      
|                          
|Istanbul, Turkey           | Altra Optik Sanayi ve Ticaret A.S.   | Optical laboratory; Distribution warehouse  | 1,496 | Owned       
|                          
|Niederau, Germany          | Altra Trading GmbH                   | Distribution warehouse                      | 2,198 | Owned       
|                          
|Cambridge, United Kingdom  | Shamir UK Limited                    | Optical laboratory, Distribution warehouse  | 1,001 | Leased      
|                          
|San Diego, California      | Shamir Insight, Inc.                 | Administration, Distribution warehouse      | 1,687 | Leased      
|                          
|Agoura Hills, California   | Shamir USA                           | Administration                              | 133   | Leased      
|                          
|Johannesburg, South Africa | Spherical Optics (Pty) Ltd.          | Distribution warehouse                      | 450   | 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 $4.4 million in order to assist the
Kibbutz with the construction of a new manufacturing facility other than our current
facilities in the Kibbutz that shall serve SSOP. On March 8, 2007, our shareholders at a
special general meeting, resolved to approve the termination of the abovementioned loan
and the entry into a sublease and services agreement with Kibbutz Shamir. The asset shall
have a total area of approximately 10,727 square meters out of which approximately9,103
square meters will be a building area (2.5 flats). We anticipate that construction of this
facility will be completed during the second half of 2007. See Item 7. Major
Shareholders and Related Party Transactions.

# ITEM 4A. UNRESOLVED
STAFF COMMENTS

Not applicable.

26

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# 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 sell
finished lenses to opticians, and utilize our capabilities to provide design services to
optical lens manufacturers under service, 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 preeminent 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.

# 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 corporation. 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 corporation 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 the year 2004, the translation adjustments
between the U.S. 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 U.S. 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 U.S. dollar-priced products. In addition, a fluctuation
in the value of the NIS compared to the U.S. dollar may have a material impact on our
expenses.

# Revenues, Net

We
generate revenues both from selling 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 four 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 2006, revenues from the sale of lenses increased by
approximately 19.6% annually 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.

27

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We
anticipate that revenues from the sale of lenses will continue to provide the majority of
our revenues. Our Freeform 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 Freeform Technology worldwide.

# 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 in Europe through our local subsidiaries. In the
second half of 2005 we 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
$13.2 million in 2004 to $23.3 million in 2006. Over the same period, Altra sales
increased from $40.3 million to $53.3 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
15.2% of our sales of lenses in 2006.

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
inter alia sub-contractor services, depreciation on property and equipment, rent
and utilities. Our cost of revenues also includes the cost of lenses purchased from other
manufactures. 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.

28

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# Gross Profit

Our
gross profit margin was approximately 53% for the year ended December 31, 2004, 55% for
the year ended December 31, 2005, and 55% for the year ended December 31, 2006. We have
maintained our margins throughout this period notwithstanding a significant increase in
manufacturing costs corresponding to the significant increase in lens revenues. Our gross
margin is affected, among other things, by the mixture of products sold, by our
penetration efforts to new markets and by the U.S. dollar versus the NIS and Euro exchange
rates.

# 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, delivery, other promotional costs, and office expenses
related to sales and marketing.

In
2006 we increased our marketing efforts in areas where we established or purchased new
subsidiaries, such as in France, the United Kingdom, Turkey and South Africa. The increase
in our selling and marketing expenses during 2006 was caused mainly as a result of higher
than expected expenses in support of our sales and marketing activities in France, and by
the increase in revenues.

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 in the short
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 officers, accounting and administrative
personnel, professional fees, office expenses and other general corporate expenses. The
increase in our general and administrative expenses was attributable to the expenses of
requirements imposed on us as a public company, and due to the increase in our management
personnel worldwide. We expect our general and administrative expenses to increase in
absolute dollar terms, but stay the same as a percentage of our revenues.

# 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 and other bank fees. Financial
expenses also incorporate adjustments due to exchange rate fluctuations.

# Stock-Based Compensation

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

Effective
as of January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective
transition method. Under that transition method, compensation cost recognized in the year
ended December 31, 2006, includes: (a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions of SFAS No.
123(R). Results for prior periods have not been restated, in accordance with the modified
prospective transition method.

29

---

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As
a result of adopting SFAS No. 123(R) on January 1, 2006, the Companys net income for
the year ended December 31, 2006, is $1,125, lower, than if it had continued to account
for share-based compensation under APB 25. Basic and diluted net income per share for the
year ended December 31, 2006, are $0.07 lower, than if the Company had continue to account
for share based compensation under APB 25.

SFAS
No. 123(R) requires companies to estimate the fair value of equity-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the requisite service
periods in the Companys consolidated income statements. Prior to the adoption of
SFAS No. 123(R), the Company accounted for equity-based awards to employees and directors
using the intrinsic value method in accordance with APB No. 25 as allowed under Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). Under the intrinsic value, equity-based
compensation recognized for the years ended December 31, 2004 and 2005, of $82 and $608,
respectively.

# Equity in Losses of
Affiliates, Net

Equity
in losses of affiliates is shown in our consolidated financial statements primarily to
reflect our 50% and 26% holdings in Shamir Einit and CIO, respectively, as of December 31,
2006, and our 50% holdings in Shamir Or as of December 31, 2004. In 2005 we had no equity
in (gains) losses of affiliates.

# Minority Interests in
Losses (Earnings) of Subsidiaries

Minority
interests are reflected in our consolidated financial statements in order to reflect our
non-wholly owned subsidiaries. Our minority interest in Eyal decreased from 49% to 2% in
December 2003, and was fully purchased in May 2004. We have a 49% minority holding in
Altra. In 2004, the minority holdings in Shamir Insight were 43.3%, during 2005 we
purchased an additional 33.3% holding in Shamir Insight, and, as a result, the minority
holdings in Shamir Insight decreased to 10% as of today. Since our acquisition of 51% in
January 2006 of Spherical Optics (Pty) ltd., we have a 49% minority holding in such
subsidiary.

During
the year 2006, the minority interests in losses significantly increased due to the
increase of losses in the subsidiaries of Altra.

# 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 corporation. 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
year 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 an Israeli corporation 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.

# 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                             |                        
|                                                       |                        
|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                                   |                        
|                                                       |                        

30

---

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Year Ended December 31,
2006 Compared To Year Ended December 31, 2005

Revenues,
Net. Total revenues were $97.3 million for the year ended December 31, 2006, an
increase of $16.9 million or 21.0% compared to total revenues of $80.4 million for the
year ended December 31, 2005. The increase was primarily attributable to the increase of
sales in the United States and Europe through our subsidiaries Shamir Insight and Altra.
Increased marketing activities of Shamir Insight in the United States resulted in $5.7
million of sales growth, while increased demand in Europe through Altra contributed
approximately $8.5 million. The sale of lenses to the rest of the world and to other
third-party manufacturers in 2006 increased by $3.7 million compared to 2005. Revenues
generated from services to third-party manufacturers, including design services, mold
production and royalties, decreased by $1.0 million between these periods.

Cost
of Revenues. Cost of revenues was $44.0 million for the year ended December 31, 2006,
an increase of $8.0 million or 22.2% compared to cost of revenues of $36.0 million for the
year ended December 31, 2005. The increase in cost of revenues was primarily due to an
increase in the number of lenses produced. As a percentage of revenues, our cost of
revenues increased from 44.8% for 2005 to 45.3% for 2006.

Research
and Development. Research and development costs were $2.4 million for the year ended
December 31, 2006, an increase of $0.7 million or 40.5% compared to research and
development costs of $1.7 million for the year ended December 31, 2005.

Selling
and Marketing. Selling and marketing expenses were $32.8 million for the year ended
December 31, 2006, an increase of $9.1 million or 38.6% compared to selling and marketing
expenses of $23.7 million for the year ended December 31, 2005. Selling and marketing
expenses increased due to our continuing activities and penetration efforts in areas in
which we established or purchased subsidiaries such as in France, the United Kingdom,
Turkey and South Africa, and due to the increase in revenues in 2006. As a percentage of
revenues, sales and marketing expenses increased from 29.4% for 2005 to 33.7% for 2006.
The increase in our selling and marketing expenses were caused mainly as a result of
higher expenses in support of our sales and marketing in our new activities, mainly in
France, the UK and Turkey. The additional expenses in 2006, related to the above mentioned
new activities, where approximately $5.5 million.

General
and Administrative. General and administrative expenses were $11.0 million for the
year ended December 31, 2006, an increase of $4.1 million compared to general and
administrative expenses of $6.9 million for the year ended December 31, 2005. Consistent
with the growth we experienced in our business. General and administrative expenses
increased as a percentage of revenues from 8.6% for 2005 to 11.3% for 2006, this increase
was attributable to the expenses of being a public company, increase in stock based
compensation, and increases in management personnel worldwide.

Financial
Income (Expenses) and other, Net. Net financial expenses and other were ($0.2) million
for the year ended December 31, 2006, a negative change of $0.6 million compared to net
financial income and other of 0.4 million for the year ended December 31, 2005. This
negative change occurred primarily due to a increase in the level of loans in the year
2006, due to investments in our European activities.

Taxes
on Income. Taxes on income were $2.2 million for the year ended December 31, 2006, a
decrease of $2.3 million compared to taxes on income of $4.5 million for the year ended
December 31, 2005. Taxes on income decreased as a percentage of revenues from 5.6% for
2005 to 2.2% for 2006. The effective tax rate for 2006 was 31.5% compared to 36.0% for the
fiscal year 2005. This decrease was attributable to realized tax benefits, mainly
resulting from changes in the taxation rules in Germany and an improvement in the tax
benefits of our manufacturing subsidiary in Kibbutz Eyal, which resulted from its status
as an Approved Enterprise according to the Israeli Tax laws.

Equity
in Losses of Affiliates, Net. Equity in losses of affiliates, net was $0.2 million for
the year ended on December 31, 2006. These losses are related to our new affiliates,
Shamir Einit, CIO and Shalens. There was no such loss in the year ended December 31, 2005.

31

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Minority
Interests in Losses (Earnings) of Subsidiaries. Minority interests in losses were $2.0
million for the year ended December 31, 2006, an increase of $1.9 million compared to
minority interests in losses of $0.1 million for the year ended December 31, 2005. This
increase of minority interest in losses was primarily attributable to the increase in
losses of the subsidiaries of Altra, mostly related to penetration to new markets.

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 $23.7 million for the year ended
December 31, 2005, an increase of 4.8 million or 25.4% 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 29.4% for 2005.

General
and Administrative General and administrative expenses were $6.9 million for the year
ended December 31, 2005, an increase of $2.3 million compared to general and
administrative expenses of $4.6 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 6.4% for
2004 to 8.6% for 2005.

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 ordinary 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.

32

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# 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 or price protection. Our
accounting for revenues is consistently applied across all of our distribution channels.

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 corporation.
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 2004 pro forma net income,
which reflects additional income taxes we would have accrued during the historical period
presented, assuming we had been an Israeli corporation 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.

33

---

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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
June 2006, the Financial Accounting Standard Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48). FIN 48 creates a single model to address uncertainty in tax positions. FIN 48
clarifies the accounting for income taxes by prescribing the minimum recognition threshold
a tax position is required to meet before being recognized in the financial statements.
FIN 48 also provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48
clearly scopes out income taxes from Financial Accounting Standards Board Statement No. 5,
Accounting for Contingencies. FIN 48 utilizes a two-step approach for
evaluating tax positions. Recognition (step one) occurs when an enterprise concludes that
a tax position, based solely on its technical merits, is more-likely-than-not to be
sustained upon examination. Measurement (step two) is only addressed if step one has been
satisfied (i.e., the position is more-likely-than-not to be sustained). FIN 48 applies to
all tax positions related to income taxes subject to SFAS No. 109, Accounting for
Income Taxes. This includes tax positions considered to be routine as
well as those with a high degree of uncertainty. Derecognition of a tax position that was
previously recognized would occur when a company subsequently determines that a tax
position no longer meets the more-likely-than-not threshold of being sustained. FIN 48
specifically prohibits the use of a valuation allowance as a substitute for derecognition
of tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006.
As a result of the implementation of FIN 48, we decreased our retained earnings as of
January 1, 2007, by approximately $340 thousands.

In
September 2006, the FASB issued Statement of Financial Accounting Standard No. 157,
Fair Value Measurements (SFAS No. 157), which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS No. 157 applies to
other accounting pronouncements that require or permit fair value measurements. SFAS No.
157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We do not
anticipate any material impact on our consolidated financial statements upon the adoption
of SFAS No. 157.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits
entities to choose to measure many financial assets and financial liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We have not yet determined the effect that the adoption of
SFAS No. 159 will have on our consolidated financial statements.

# 5.B LIQUIDITY AND
CAPITAL RESOURCES

From
the commencement of our business through December 31, 2006, we have self-funded and grown
our business principally from cash flow from operations and loans. 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 ordinary shares.

As
of December 31, 2006, we had working capital of $59.9 million, cash and cash equivalents
and short term investments of $40.1 million and unused lines of credit of approximately
$8.5 million.

34

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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 (used in) provided by operating activities |                        
|Net cash used in investing activities               |                        
|Net cash provided by (used in) 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, capital
leases 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 ordinary 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 $9.1 million, $10.0 million for the years ended
December 31, 2004, and 2005, respectively. For the year ended December 31, 2006, our
operating activities used cash of $1.0 million. The change in net cash used by operating
activities reflects the growth in working capital items against and a decrease in
profitability due to penetration efforts in France, UK and Turkey. As revenues grow, our
trade receivables and inventory grow, requiring an increase in our required level of
working capital.

Our
investing activities used cash of $5.5 million, $24.8 million and $14.6 million for the
years ended December 31, 2004, 2005 and 2006, respectively. The 2006 figures include $2.2
million of short term investments, net. The 2005 figures include $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 subsidiaries and affiliates, such
as the Cambridge Optical Group in 2004, the acquisition of additional shares in Shamir
Insight, the establishment of SSOP, Shamir France and Altra Turkey in 2005, the
acquisitions of CIO and Spherical Optics (Pty) Ltd. in 2006, and the establishment of
Shalens in 2006.

Our
financing activities provided cash of $36.5 million and $10.9 million for the years ended
December 31, 2005 and 2006, respectively. For the year ended December 31, 2004, our
financing activities used cash of $3.5 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 $6.6 million for the year ended December 31, 2004,
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).
In 2006 we received long-term loans and short-term bank credit totaling $12.3 million and
$4.0 million, respectively. The receipt of long-term loans was due to our financing of our
operations through Altra in Turkey, France and the United Kingdom, and for the expansion
of the laboratory in Portugal due to the increase of our European activities.

35

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Borrowings

|                                       | Weighted
Average
Interest
Rate | December 31,2006
(U.S. dollar in
thousands)
|-------------------------------------- | ------------------------------ | -------------------------------------------
|
|
|
|
|Short-term bank credit and loans       |                                |                                            
|denominated in Euro                    |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|Minority shareholders in subsidiaries: |                                |                                            
|Euro                                   |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|Long-term loans:                       |                                |                                            
|Dollars                                |                                |                                            
|Euro                                   |                                |                                            
|NIS                                    |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|Total bank credit and loans            |                                |                                            
|                                       |                                |                                            

As
of December 31, 2006, we had aggregate short-term bank credit, short-term loans and
long-term loans of $1.4 million, $12.3 million and $20.7 million, respectively ($0.6, $7.8
and $11.2, respectively, in 2005). As of December 31, 2006 and 2005, we had aggregate
capital leases of $6.0 million and $1.9 million, respectively. These borrowings are
divided between our subsidiaries and us as follows: $33.4 million are held by Altra, $1.6
million are held by Eyal and Eyal Holdings, and $0.3 million from other subsidiaries. In
addition, there are $5.1 million loans from minority shareholders. The increase in
borrowings is attributed to the high penetration expenses in France, UK and Turkey, and
for the expansion of the laboratory in Portugal due to the increase of our European
activities.

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

We
are focused on research and development, and the success of our business depends
substantially on the results of our R&D 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, 2006 and 2005, and 2004 was
$2.4 million, $1.7 million and $1.8 million, respectively.

# 5.D TREND INFORMATION

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

36

---

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# 5.E OFF- BALANCE SHEET
ARRANGEMENTS

None

# 5.F CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS

The
following table summarizes our contractual and commercial obligations and commitments as
of December 31, 2006, in thousands of U.S. dollars:

|                                                         | Payments Due In
|-------------------------------------------------------- | ---------------
|
|
|
|
|Contractual obligations:                                 |                
|                                                         |                
|Long-term debt (without loans from minority shareholders |                
|in subsidiaries) (1)                                     |                
|Capital lease                                            |                
|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.
| | --- | --------------------------------------------------------

37

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# 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-Zeev and Rami Ben-Zeev are
brothers. 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-Ze'ev(1)(2) | 64  |  | Director; President and Chief Executive Officer                           
|Dan Katzman           | 52  |  | Chief Technology Officer and Vice President of R&D                        
|Dagan Avishai(1)(2)   | 47  |  | Executive Vice President, Vice President of Marketing                     
|Yagen Moshe           | 37  |  | Chief Financial Officer                                                   
|Rami Ben-Ze'ev(1)(2)  | 58  |  | Vice President Business Management                                        
|Eyal Hayardeny        | 37  |  | Executive Vice President, Vice President of Business Development          
|Giora Salz            | 49  |  | President and Chief Executive Officer of Eyal Optical Industries (95) Ltd.
|Ra'anan Naftalovich   | 42  |  | Chief Executive Officer of Shamir Insight, Inc.                           
|Ron Sonnenchein       | 57  |  | Chief Executive Officer of Altra Trading GmbH                             
|Uzi Tzur(1)(4)        | 67  |  | Director and Chairman of the Board                                        
|Efrat Cohen(2)        | 39  |  | Director                                                                  
|Guy Vaadia(3)         | 43  |  | Director                                                                  
|Ami Samuels(5)        | 48  |  | Director                                                                  
|Joseph Tzur(5)        | 54  |  | Director                                                                  
|Ze'ev Feldman(3)      | 55  |  | 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.
| | --- | --------------------------------------

Giora
Ben-Zeev. Mr. Ben-Zeev 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-Zeev holds a BSc degree from the Technion Israel Institute
of Technology in industrial and management engineering.

Dan
Katzman. Mr. Katzman joined our company in 1981 as an engineer and became Chief
Technology Officer and Vice President of R&D in 1985. An internationally recognized
expert in optical research and development, he has headed our research and development
teams since then. He holds a BSc 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.

Yagen
Moshe. Mr. Moshe has been our Chief Financial Officer since July 2006. Prior to this
position he served as our Vice President of Finance since March 2005. He served from 2001
to 2005 as the Chief Financial Officer of Comsec Ltd., an Israeli public company that is
listed on the Tel Aviv Stock Exchange, and he worked as a Senior Manager in Ernest &
Young Israel from 1996 to 2000. Mr. Moshe holds a BA degree in accounting and management
from the College of Management in Tel-Aviv, he is a certified public accountant in Israel,
and holds a MA in law from the Bar-Ilan University in Ramat-Gan.

Rami
Ben-Zeev. Mr. Ben-Zeev joined our company as business manager and Vice
President in 2001. Previously, he served as Chief Financial Officer of Tel Hay Rodman
Regional College from 1999 to 2001 and as financial manager of Kibbutz Shamir from 1992 to
1995. 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.

38

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

Giora
Salz. Mr. Salz joined our company as President and Chief Executive Officer of Eyal
Optical Industries (95) Ltd. in 2004. In addition, since 2006 he has been serving as
chairman of the board of directors of Shamir Special Optical Products Ltd., and as member
of the board of directors of Shamir Einit Ltd. Previously, he served as Chief Executive
Officer of Lehavot Manufacturing and Protection (95) Ltd., a fire defense equipment
company, from 1989 to 1999, and as the agriculture manager of Kibbutz Lehavot from 1983 to
1985. Mr. Salz holds a BA degree in economics and business management from Tel Aviv
University and served as a Lieutenant Colonel in the Israeli armed forces.

Raanan
Naftalovich.Mr. Naftalovich has been the Chief Executive Officer of Shamir Insight,
Inc. since 1999. Prior to this position he served in various positions in Shamir Insight,
Eyal and Shamir such as Marketing Vice President of Shamir Insight from 1997 until 1999,
and Product Manager, Marketing Director, and International Regional Export Manager of
Shamir and Eyal from 1994 to 1997. Mr. Naftalovich holds a BA degree in business
administration from the College of Management in Tel-Aviv.

Ron
Sonnenchein. Mr. Sonnenchein has been the Chief Executive Officer of Altra Trading
GmbH since 2002. Prior to this position he served as the Executive Vice President of
Altra. Prior to its acquisition by us Mr. Sonnenchein served as the President and Chief
Executive Officer of Eyal Optical Industries (95) Ltd. from 1982 to 1989. Previously, he
served as the treasurer of Kibbutz Eyal between the years 1975 and 1979. Mr. Sonnenchein
holds a BA degree in political science and international relations from Tel Aviv
University.

Uzi
Tzur. Mr. Tzur has been a member of our board of directors since its original
establishment in 1997 and the chairman of our board of directors since April 2007. He
served as acting chairman of the board of directors 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 board of directors of Shalag
Industries, Ltd., and was a board member of N.R. Spuntech Industries Ltd., two companies
that are located in Kibbutz Shamir and 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 A.C.S. Ltd., an Israeli trading
company. He has over twenty years of experience in different managerial positions. He
holds a BA and an MBA 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.

Guy
Vaadia.Mr. Vaadia has been a member of our board of directors since March 2007. He is
currently the Chief Executive Officer of FIBI Investment House Ltd. From 1999 to 2005 he
was the senior leading officer of Bank Mizrahi at the corporate banking division. He has
also served as a personal assistant to the president of Bank Mizrahi and has been a board
member of the Investment Corporation of United Mizrahi Bank Ltd. Mr. Vaadia has also
formerly served as the Senior Economist of Israel Chemicals Limited. He holds an MSc
degree in economics and management from the Hebrew University of Jerusalem and an MBA
degree from INSEAD, Fontainebleau France.

Ami
Samuels. Mr. Samuels has been a member of our board of directors since March 2005. He
is currently a Senior Director, Private Equity at Poalim Capital Markets, a wholly owned
subsidiary of Bank Hapoalim. From 2004 to 2006, Mr. Samuels was a Partner at Star
Ventures, an international venture capital fund. From 2001 to 2003, he served as Senior
Vice President and Chief Financial Officer of Satlynx, a company specializing in two-way
satellite broadband services. From 1998 to 2001, he was Vice President for broadband
networks at Gilat Satellite Networks, and from 1989 to 1998, he worked as an investment
banker at Lehman Brothers. He holds a BA degree from Haifa University and a Masters
degree in Management from Yale University.

Dr.
          Joseph Tzur.Dr. Tzur has been a member of our board of
directors           since April 2007. He is currently a faculty member at the Business
School of Ono           Academic College and since October 1984 he has taught at the
Department of           Economics of the Bar-Ilan University. From October 2004 to
September 2006, he           served as the Head of the Department of Economics of the
Ruppin Academic Center.           Dr. Tzur published several articles with respect to
agency relationships, tax           issues, financial accounting and the market of
accounting services. He holds a           PhD and MPhil in accounting from the Graduate
School of Business of Columbia           University, New York, and a BA in economics and
accounting from the Bar-Ilan           University, Ramat Gan, Israel, and is a certified
public accountant.

39

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Zeev
Feldman. Mr. Feldman has been a member of our board of directors since March 2005. He
is currently the Chief Executive Officer of Feldaz Investments Ltd. and Feldaz 2005 Ltd.,
and a member of the board of directors of Azimuth Ltd. From 1998 to 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 Cellcom Israel Ltd., Union Banks Mutual Funds Ltd., FIBI
Investment House Ltd., Intergama Ltd. (Chairman), 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.

# Board of Directors

As
a corporation, 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 seven directors. Two of these directors are
External Directors in accordance with the Israeli Companies Law. See
External Directors. These two External Directors and two additional
directors qualify as independent directors for purposes of the listing requirements of the
NASDAQ Global 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 B will expire at the next annual meeting of shareholders, which will
take place during the year of 2008, and at each third succeeding annual meeting
thereafter. The term of office of the directors assigned to class C will expire at the
annual meeting of shareholders, which will take place during the year of 2010, and at each
third succeeding annual meeting thereafter. The term of office of the directors assigned
to class A will expire at the annual meeting of shareholders, which will take place during
the year of 2009, and at each third succeeding annual meeting thereafter. Giora
Ben-Zeev and Zeev Feldman serve as class A directors, Efrat Cohen and Guy
Vaadia serve as class B directors and Uzi Tzur 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.

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.

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.

40

---

---

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.

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 and thereafter for additional
three-year terms, if both the audit committee and the board of directors confirm that in
light of the expertise and contribution of the External Director, the extension of such
External Directors term would be in the interest of our company. External Directors
may be removed only by the same special majority required for their election or by a
court, and then only if the External Directors cease to meet the statutory qualifications
for their appointment or if they violate their duty of loyalty to 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.

41

---

---

# 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.

Recently
our shareholders at their annual meeting that took place on April 26, 2007, resolved that
each of the current and future directors, including the External Directors but excluding
our chairman and chief executive officer, shall be entitled to an annual fee of $15,000,
paid in quarterly installments of $3,750 each. Each director who is a member of a
committee of the board of directors shall be entitled to an additional annual fee of
$5,000, paid in quarterly installments of $1,250 each. No additional fee will be paid for
membership in more than one committee. 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 ordinary shares to each of our directors serving as of
the date of the options grant, including the External Directors but excluding our chairman
and chief executive officer. We do not plan to pay any compensation to our chief executive
officer for his service as a director. The aggregate direct compensation we paid our
directors as a group (nine persons) for the year ended December 31, 2006 was $0.1
million.Following their resignation from our board of directors Jed Arkin and Amos
Netzer each have options to purchase 11,770 of our ordinary shares, which are exercisable
until July 26, 2007.

On
January 1, 2005, we entered into an agreement with Yair Shamir, the former chairman of our
board of directors, according to which we paid him $6,000 per month for his services as
chairman of the board. Mr. Shamir resigned on April 26, 2007. Pursuant to the agreement,
we also agreed to grant Mr. Shamir options to purchase 160,961 of our ordinary shares.
Theses options were granted on March 10, 2006, one year following our initial listing on a
U.S. stock exchange, of them, 72,935 are currently exercisable until July 26, 2007. As of
the date of this annual report, we have not entered into an agreement with our current
chairman, Uzi Tzur.

The
aggregate direct compensation we paid to our officers as a group (nine persons) for the
year ended December 31, 2006, 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), was approximately $1.8 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, or other benefits commonly
reimbursed or paid by companies in Israel. We have also granted options to purchase our
ordinary shares to our officers as part of their overall compensation. See
Employee Share Ownership.

As
of June 15, 2007, options granted to our current and former directors and officers to
purchase a total of 1,129,686 of our ordinary shares were outstanding, at exercise prices
ranging from $0 to $14 with a weighted average exercise price of $8.1 per share. See
Employee Share Ownership for a description of the options granted to our
officers.

# 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 directors
and must include both of the External Directors. In addition, the rules of the NASDAQ
Global Market require that at least one member of our audit committee have experience or
background that results in such members financial sophistication. Our audit
committee is comprised of Ami Samuels as chairman, Joseph Tzur and Zeev Feldman. Our
board of directors has determined that Zeev Feldman is financially sophisticated for
purposes of the NASDAQ rules. 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 Global 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.

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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 Zeev Feldman as chairman, Joseph Tzur and Ami
Samuels. The composition and functions of the compensation committee meet the requirements
of the NASDAQ Global 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 Zeev Feldman as
chairman, Joseph Tzur and Guy Vaadia. The composition and functions of the nominating and
governance committee meet the requirements of the NASDAQ National Global 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.

# 6.D EMPLOYEES

As
of June 15, 2007, our worldwide workforce consists of 935people, which includes
approximately 43employees 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 for the past three years.

|Department or location        | 2004 | 2005 | 2006
|----------------------------- | ---- | ---- | ----
|
|
|
|
|Research and development      |      |      |     
|Marketing and sales           |      |      |     
|Management and administration |      |      |     
|Manufacturing and warehouse   |      |      |     
|                              |      |      |     
|Total                         |      |      |     
|                              |      |      |     
|                              |      |     
|Israel                        |      |      |     
|United States                 |      |      |     
|Europe                        |      |      |     
|South Africa                  |      |      |     
|                              |      |      |     
|Total                         |      |      |     
|                              |      |      |     

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.

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

# 6.E SHARE OWNERSHIP

Our
chief executive officer and other certain employees, other than directors, hold options to
purchase 1,593,867 of our ordinary shares. In addition, 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 former chairman of our board, Yair
Shamir, and our chief executive officer, Giora Ben-Zeev). For a description of the
options held by our directors, please see Compensation of Directors and
Management.

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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-Zeev, and options to purchase up to 66,973 of our shares to each of our
former chief financial officer, and to 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 Dan Katzman, the head of the research and development department. The exercise price
for these options is $12.43. 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 our former chief financial officer of options to purchase 33,487
shares at the exercise price of $11.55 per share.

On
June 8, 2005, Shamir Insight granted options to acquire its shares to two of its officers.
On December 29, 2005, the option grant was cancelled by Shamir Insight. 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 officers of Shamir Insight, 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 of directors and compensation committee,
100,000 options were granted to Eyal Hayardeny at an exercise price of $9.97 per share. On
August 14, 2006 the board ratified the compensation committees resolution from July
28, 2006, to grant Eyal additional 47,000 options with an exercise price of $8.86 per
share.

On
July 1, 2006, our former chief finance officer, Amir Hai, resigned from his position in
our company. Pursuant to his retirement agreement, 33,486 of his options, which were
unvested and were not expected to be vested as of the resignation date were cancelled. The
vesting period of the remaining 66,974 options was accelerated so that they were all fully
vested as of July 1, 2006. The exercise price of 50,230 options is $10.3 per share, and of
16,744 options is $11.55 per share. All of the options are valid until July 31, 2008.

On
June 30, 2006, we granted Yagen Moshe, our current chief finance officer, 50,000 options
at an exercise price of $9.00 per share. Pursuant to the terms and conditions of
Yagens employment agreement and subject to any required approval we intend to grant
Yagen additional 50,000 options by July 1, 2007.

On
April 30, 2007, our board ratified its compensation committee resolution from April 1,
2007, to grant 35,000 options with an exercise price of $9.82 per share each to Youval and
Zohar Katzman, research and development employees of SSOP, in place of the options that
have been granted to them on May 15, 2006, which were canceled.

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 could grant 350,000 options to purchase our
shares and in each following year the option pool shall increase by an additional 280,000
options.

The
options that were granted prior to the adoption of the 2005 General Share and Incentive
Plan during the years 2004 and 2005 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 granted pursuant to our Israeli Plan for the Allotment of
Shares/Options for 2003, and 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.

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On
June 5, 2000, we granted options to purchase 120,480 of our ordinary shares to Michael
Latzer, the President of Shamir USA, with an exercise price of $9.96 per share. The
options may be exercised no later than December 31, 2008.

# ITEM 7. MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

# 7.A MAJOR SHAREHOLDERS

The
following table and footnotes set forth information, as of June 15, 2007, regarding the
beneficial ownership of our ordinary shares by:

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

| | each
of our directors or executive officers who beneficially owns one percent or more 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 and options currently exercisable or exercisable within 60 days of June 15, 2007.

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 it. All of our
shareholders have the same voting rights. Percentage ownership is based on 16,256,514
ordinary shares outstanding as of June 15, 2007. 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. The offices of
Royce & Associates, LLC, are located at 1414 Avenue of the Americas, New York, NY
10019. Other than Dan Katzman, none of our directors or executive officers beneficially
owns one percent or more of our outstanding share capital.

|Name of Beneficial Owner      | Percent of Shares | Number of Shares
|----------------------------- | ----------------- | ----------------
|
|
|
|
|Kibbutz Shamir(1)             |                   |                 
|FIBI Investment House Ltd.(2) |                   |                 
|Dan Katzman(3)                |                   |                 
|Royce & Associates, LLC(4)    |                   |                 

---

|(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-Zeev, Efrat Cohen, Dagan                Avishai, Rami Ben-Zeev 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, Zeev Markman, Ilan Pickman, Pinchas Carmi,                Yossi
Michaeli, Yaakov Gotlib, Maya Segal and Omry Rotem.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | FIBI
is an affiliate of a broker-dealer. FIBI 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(4) | Based
solely on information contained in Schedule 13G filed with the SEC by
               Royce & Associates, LLC on January 31, 2007.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

| | There
are no holders of record of our ordinary shares who are, to our knowledge, U.S. persons.
| | ----------------------------------------------------------------------------------------------

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# 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 300
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 owns Shalag Industries, Ltd., a
company that, like us, is located on the grounds of Kibbutz Shamir. Shalag Industries,
Ltd. is engaged in the manufacture and sale of non-woven cloth and is 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 the Kibbutz 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 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 a
simple majority vote. The boards of directors of Kibbutz Shamirs companies operate
independently from the management board of Kibbutz Shamir itself. The chairman of our
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-Zeev, and two of our companys executive officers, Dagan Avishai and Rami
Ben-Zeev, 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. As of June 15, 2007,
approximately 43 members of our 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.

Working Services
Agreement with Kibbutz Shamir

We
entered into a Working Service Agreement with Kibbutz Shamir in February 2005. Under the
working services 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. The
agreement exempts our chief executive officer, Giora Ben-Zeev, and our executive
vice president, Dagan Avishai, who signed individual employment agreements and are not
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 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 may, for reasonable cause,
refuse to accept workers referred to us by Kibbutz Shamir or demand the replacement of
existing workers.

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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 expires on March 10, 2010, 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
2006 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.

On
January 18, 2007, Kibbutz Shamir granted approval for our subsidiaries SSOP and Eyal
Optical Industries (95) Ltd. to employ directly (i.e. not through the working service
agreement) local members of Kibbutz Shamir.

On
May 28, 2007, our audit committee and board of directors resolved to enter into, subject
to the approval of our shareholders, a new working service agreement with Kibbutz Shamir.
The terms of new working service agreement are substantially similar to the terms of the
current agreement, extending the reimbursement rights of the Company for any liabilities
that may arise under an imputed employer-employee relationship between us and the members
of Kibbutz Shamir who provide the services and providing that the Company is entitled to
determine at its discretion with respect to new workers provided by Kibbutz Shamir
and current workers whose scope of position has changed since the date of the new working
service agreement, the consideration to be paid by the Company.

Service Agreement with
Kibbutz Shamir

In
February 2005, we entered into a service agreement with Kibbutz Shamir, pursuant to which
Kibbutz Shamir provides us with catering, laundry, switchboard and communications,
maintenance and landscaping, trash removal services and water usage.

The
fee for all of these services except water usage was initially fixed at NIS 92,000 per
month. The fee is linked to the consumer price index and reviewed every five years. In the
event that the cost to Kibbutz Shamir of providing these services increases or decreases
during the final year of the agreements five-year cycle as compared to the effective
date of the agreement, 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.

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 expires on March 10, 2010, with automatic renewal for periods of
five years, unless terminated earlier by either party upon 12 months written notice.

In
2006 we paid a total of approximately $0.3 million to Kibbutz Shamir under the service
agreement.

On
March 8, 2007, our shareholders at a special shareholders meeting approved a new service
agreement between Kibbutz Shamir and our subsidiary, Shamir Special optical Products Ltd.,
or SSOP, for the period commencing upon the acceptance of the new factory that is being
built in Kibbutz Shamir for SSOP and ending on February 9, 2010, pursuant to which Kibbutz
Shamir will provide administrative and maintenance services to SSOP to maintain the
factory. SSOP shall pay Kibbutz Shamir a monthly fee of NIS 25,000 linked to the Consumer
Price Index. In the event that the actual cost of services in any year is higher or lower
by 30% or more compared to the service fee paid in the preceding calendar year, not taking
into account extraordinary expenses not in the ordinary course of business, the service
fee for the following year will be adjusted accordingly. The term of the service agreement
will be extended automatically for additional periods of five years each unless either of
the parties terminates the service agreement by giving 12-months advance notice
prior to the scheduled expiration date. The service fee will be adjusted at the end of the
initial term of the service agreement and then every five years, assuming that the service
agreement is extended, based on the actual cost of services in the year preceding the
adjustment date.

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On
May 28, 2007, our audit committee and board of directors resolved, subject to the approval
of our shareholders, to enter into a new arrangement with Kibbutz Shamir. Under the new
service arrangement between the Company and Kibbutz Shamir, we and our subsidiaries will
be entitled to purchase additional services not covered by the current service agreement.
The consideration for a single transaction will be no greater than $7,000 (plus VAT, if
required by law), and the aggregate consideration for services purchased by us and our
subsidiaries during any calendar year will be no greater than $300,000 (plus Vat, if
required by law). At least one additional proposal in writing from an unaffiliated third
party shall be obtained prior to each service order.

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 4,786 square meters,
and a yard of approximately 2,296 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, or 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 3,637 square meters and a yard of approximately 2,296 square meters. Kibbutz
Shamir constructed an additional 1,149 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.

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 properties 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.

48

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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 2006 we paid a total of approximately $0.3 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 into a lease agreement with Kibbutz Shamir.

On
June 4, 2006, we signed a memorandum of understanding with Shalag Industries Ltd.,
pursuant to which we rent 120 square meters for SSOP. This memorandum of understanding
provides for the same rental amounts as the sublease agreement with Kibbutz Shamir, as
described above.

On
March 8, 2007, our shareholders at their special shareholders meeting resolved that in
lieu of such lease, we and Kibbutz Shamir enter into a lease agreement pursuant to which
we will lease the new factory that is currently under construction in the Kibbutz for SSOP
until November 30, 2023 commencing on the earlier of the: (i) date of occupancy, or (ii)
date of the completion of the construction. We will be entitled to terminate the lease at
any time; provided, however, that we have located an alternate tenant and Kibbutz Shamir
has given its consent, which consent would not be reasonably withheld. The parcel of land
underlying the factory will be included in the long-term lease between Kibbutz Shamir and
ILA, pursuant to which Kibbutz Shamir may, with the consent of the ILA, sublease the
parcel to a corporation under its control. The consent of the ILA for the lease, though,
has not been obtained. In addition, the ILA may, from time to time, change its regulations
governing such lease agreement, which could affect the terms of the lease, and may trigger
the termination of the lease. Under the lease, Kibbutz Shamir will be responsible for any
expense resulting from actions of the ILA. The annual rental fees pursuant to the lease
would be payable quarterly and would be in the amount equal to 10% of the actual
construction cost of the factory, excluding VAT and grants of the Investment Center, as
certified by the board of directors of SSOP, but in no event more than $500,000 per annum.
The annual rent per square meter under the lease is approximately equal to the annual rent
per square meter under the terms and conditions of the former lease agreement for such
factory as originally approved.

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 approximately $0.4 million 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, which bears annual interest at
a variable rate equal to annual LIBOR plus 1.5%. The loan provided Kibbutz Shamir with
funds for the construction of a building on the Kibbutzs territory, for our use. At
our shareholders special general meeting of March 8, 2007, our shareholders approved the
termination of the loan. As of the date of this annual report, the loan was fully
repaid.

Shareholders Agreement

On
February 9, 2005, certain of our shareholders entered into a new shareholders agreement,
which became effective upon the listing of our securities for trading on a U.S. stock
exchange.

The
agreement gives FIBI the right to nominate one director to our board of directors. The
agreement obligates Kibbutz Shamir and the other shareholders party to the agreement to
vote in favor of FIBIs nominee, and FIBI to vote in favor of the directors nominated
by Kibbutz Shamir.

49

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In
addition, the agreement gives FIBI and our shareholders Scorpio BSG Ltd., Gishrei
Asia Ltd. and JFJ International Trading Ltd. a tag-along right to participate in
a sale (other than a transfer to an affiliate or sales to the public on the stock exchange
on which our shares are listed) of our shares by Kibbutz Shamir to a third party on a pro
rata basis and on the same terms as those negotiated by Kibbutz Shamir with the third
party.

Finally,
the agreement gives Kibbutz Shamir a right of first offer to purchase any of our shares
held by FIBI, Scorpio BSG Ltd., Gishrei Asia Ltd. and JFJ International
Trading Ltd. that any one of these entities intends to offer for sale to a third
party and which constitutes at least 2.5% of our share capital on the same terms as those
to be offered by the selling entity to the third party. This right of first offer will not
apply to transfers to affiliates or sales to the public on the stock exchange on which our
shares are listed.

The
agreement terminates when the aggregate holdings of FIBI, Scorpio BSG Ltd., Gishrei
Asia Ltd. and JFJ International Trading Ltd. decrease below 5% of our issued and
outstanding share capital and remain below 5% for a period of at least 90 consecutive
days. These four entities currently hold approximately 10.5% of our outstanding shares.

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. We acquired our
wholly-owned manufacturing subsidiary, Eyal Optical Industries (1995) Ltd., or 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 4,170 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 corporation.

Kibbutz
Eyal holds a tag-along right to join a sale of our shares by Kibbutz Shamir in certain
circumstances. Kibbutz Eyal waived its right to appoint a member of our board of directors
on November 27, 2004, effective as of the closing of the March 2005 offering. Kibbutz Eyal
currently holds approximately 1.87% of our shares.

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.

# 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 Industries (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.

50

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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
2006, substantially, all of our mold and semi-finished lenses were produced in Israel.
Production of finished lenses took place outside of Israel. Most of our export sales from
Israel abroad are to our subsidiaries. Our export sales from Israel abroad to external
customers total approximately $7.9 million, which is 8.2% of our total sales volume.

# 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. A Licensing Agreement is
currently being negotiated between the parties.

In
September 2003, we received a notice from a large lens manufacturer regarding a claim of
patent infringement relating to lens produced using our software. We have denied any such
infringement, and numerous discussions between the companies (and counsel)
ensued in order to resolve the matter without resorting to litigation. Currently, there is
an agreement in principle on the monetary terms of a settlement; however, several key
terms and conditions of the agreement are still under discussion.

On
June 8, 2006, BMC Industries, Inc. (Vision Ease) filed a complaint in order to avoid and
recover preferential transfers due to Shamir USA. The payment amount in question that was
received during the Preferential Period (March 25, 2004 through June 22, 2004)
was estimated at $0.347 million. In January 2007, we settled the dispute for the sum of
$0.1 million and all charges have been withdrawn.

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. 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 in December 2004, and 5.2 million in 2005. We may decide not to maintain the
level of dividend payments made during prior years, 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 20 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 high and low sales prices of our ordinary shares on the NASDAQ
Global Market for each of periods indicated below.

| | Year                                                                  | High | Low
| | --------------------------------------------------------------------- | ---- | ---
|
|
|
|
| | 2005 (for the period from March  10, 2005 through  December 31, 2005) |      |    
| | 2006                                                                  |      |    

| | 2005           | High | Low
| | -------------- | ---- | ---
|
|
|
|
| | Third Quarter  |      |    
| | Fourth Quarter |      |    

| | 2006           |  | 
| | -------------- |  | 
|
|
|
|
| | First Quarter  |  | 
| | Second Quarter |  | 
| | Third Quarter  |  | 
| | Fourth Quarter |  | 

| | 2007                             |  | 
| | -------------------------------- |  | 
|
|
|
|
| | First Quarter                    |  | 
| | Second Quarter (through June 15) |  | 

| | Month                       | High | Low
| | --------------------------- | ---- | ---
|
|
|
|
| | December 2006               |      |    
| | January 2007                |      |    
| | February 2007               |      |    
| | March 2007                  |      |    
| | April 2007                  |      |    
| | May 2007                    |      |    
| | June 2007 (through June 15) |      |    

The
table below shows the high and low sales prices of our ordinary shares on the Tel Aviv
Stock Exchange for each of the periods indicated below.

| | Year                                                             | High | Low
| | ---------------------------------------------------------------- | ---- | ---
|
|
|
|
| | 2005 (for the period from May 2, 2005 through December 31, 2005) |      |    

| |      |  | 
| | ---- |  | 
|
|
|
|
| | 2006 |  | 

| | 2005           | High | Low
| | -------------- | ---- | ---
|
|
|
|
| | Third Quarter  |      |    
| | Fourth Quarter |      |    

| | 2006           |  | 
| | -------------- |  | 
|
|
|
|
| | First Quarter  |  | 
| | Second Quarter |  | 
| | Third Quarter  |  | 
| | Fourth Quarter |  | 

| | 2007                             |  | 
| | -------------------------------- |  | 
|
|
|
|
| | First Quarter                    |  | 
| | Second Quarter (through June 15) |  | 

| | Month                       | High | Low
| | --------------------------- | ---- | ---
|
|
|
|
| | December 2006               |      |    
| | January 2007                |      |    
| | February 2007               |      |    
| | March 2007                  |      |    
| | April 2007                  |      |    
| | May 2007                    |      |    
| | June 2007 (through June 15) |      |    

52

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# 9.B PLAN OF DISTRIBUTION

Not
applicable.

# 9.C MARKETS

Our
ordinary shares have been listed on the NASDAQ Global Market since March 11, 2005, under
the symbol SHMR. Our ordinary 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.

# 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 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 our board of directors may determine at 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 this annual report.

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 ordinary 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.

53

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# 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.

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 ordinary 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 ordinary 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.

54

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# 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
ordinary shares do not have cumulative voting rights in the election of directors.
Therefore, the holders of ordinary shares representing more than 50% of the voting power
at the general meeting of the shareholders, in person or by proxy, have the power to
elect all of the directors whose positions are being filled at that meeting, to the
exclusion of the remaining shareholders. External Directors are elected by a majority
vote at a shareholdersmeeting, provided that either: (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. Our Articles of Association contain provisions
providing for staggered terms for the members of our board of directors.

# Voting,
Shareholders Meetings and Resolutions

Holders
of ordinary shares have one vote for each ordinary 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.

55

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# Transfer Agent and
Registrar

We
have appointed American Stock Transfer & Trust Company as the transfer agent and
registrar for our ordinary 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
ordinary shares are listed on the NASDAQ Global Market under the symbol "SHMR" and on the
Tel Aviv Stock Exchange.

# 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 11,847,487 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 became effective in September 2005 and will terminate
either in February 2011or, 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.

# 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 for purposes of this summary 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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
aspects 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.

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 our 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 the U.S. tax rate. 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.

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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, 2007. 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.

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 in a timely manner.

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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 ordinary 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
ordinary 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 (C.F.C) was
introduced according to which a foreign company may become subject to Israeli taxes on
certain income of a non-Israeli subsidiary if, among other things, 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. Capital
gains tax is reduced to 25% from 36%, except with respect to capital gains from marketable
securities, with transitional provisions for assets acquired prior to January 1, 2003. For
further discussion see below Capital Gains Tax.

General Corporate Tax
Structure

Israeli
companies are currently subject to tax at the rate of 29% 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, 27% in 2008, 26% in 2009 and in 2010
and thereafter  25%. 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 and geographic location, rather than the usual rate described above, for the
benefit period . This period is seven to 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.

A
company that has an approved enterprise program is eligible for further tax benefits if it
qualifies as a foreign investors company. A foreign investors company is a
company more than 25% of whose share capital and combined share and loan capital is owned
by non-Israeli residents. A company, which qualifies as a foreign investors company
and has an approved enterprise program is eligible for tax benefits for a ten-year benefit
period instead of the ordinary seven-year period. Income derived from the approved
enterprise program will be exempt from tax for a specified period and will be taxed at a
reduced rate for the rest of the period. The tax rate for the additional eight years is
25%, unless the level of foreign investment exceeds 49%, in which case the tax rate is 20%
if the foreign investment is more than 49% and less than 74%, 15% if more than 74% and
less than 90%, and 10% if 90% or more.

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 the income from our Approved
Enterprise facilities. Subject to compliance with applicable requirements, the current
benefits will continue until 2008 with respect to the second approved enterprise, until
2010 with respect to the third approved enterprise program, and with respect to the fourth
approved enterprise program we are currently considering when to start its benefits year
(i.e. the year 2005 or 2006), and accordingly it will continue until the year 2014 or the
year 2015 (assuming that more than 25% of the shares of the company are held by foreign
residents).

A
portion of the facilities of Eyal has been granted the status of an Approved Enterprise
under three programs of the alternative package of benefits. Income arising from our
Approved Enterprise facilities in Eyal 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. The last year for reduced tax rates in the three programs are 2006, 2008, 2012,
respectively. The benefits are contingent upon compliance with the terms of the approval
and of the Encouragement Law.

As
of the year 2010, as detailed above, the percentage the Israeli corporate tax rate will be
at the same rate of the Approved Enterprise tax rate.

All
dividends are subject to 15% tax rate (instead of 25%). When a company with an approved
enterprise income and regular income distributes dividend, it is 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 will 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.

A
portion of the facilities of SSOP, the polycarbonate and the finished lenses production
facilities, received a pre-ruling from the ITA, where it was declare a Privilege
Enterprise (establishment), so that all of its income form the abovementioned facilities
will be exempted from tax for a period of ten years beginning with the year in which it
first had taxable income. SSOP has not begun to enjoy the tax benefits in the year 2006
due to its accumulated losses.

# 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. As of the year 2006, Eyal and SSOP also
elected to measure their results for tax purposes on the basis of the changes in the
exchange rate of NIS against the U.S. 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.

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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.

# Taxation of our
Shareholders

Capital Gain

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

The
capital gain accrued by individuals on the sale of an asset purchased on or after January
1, 2003, will be taxed at the rate of 20%. However, if the individual shareholder is a
Controlling Shareholder (i.e., a person who holds, directly or
indirectly, alone or together with other, 10% or more of one of the Israeli resident
companys means of control at the time of distribution or at any time during the
preceding 12 months period) such gain will be taxed at the rate of 25%. In addition,
capital gain derived by an individual claiming deduction of financing expenses in respect
of such gain will be taxed at the rate of 25%. The real capital gain derived by
corporation will be generally subject to tax at the rate of 25%. However, the real capital
gain derived from sale of securities, as defined in Section 6 of the Inflationary
Adjustment Law, by a corporation, which was subject upon December 31, 2005, to the
provisions of Section 6 of the Inflationary Adjustment Law, will be taxed at the corporate
tax rate (31% in 2006). The capital gain accrued at the sale of an asset purchased prior
to January 1, 2003, will be subject to tax at a blended rate. The marginal tax rate for
individuals (up to 49% in 2006) and the regular corporate tax rate for corporations (31%
in 2006) will be applied to the gain amount which bears the same ratio to the total gain
realized as the ratio which the holding period commencing at the acquisition date and
terminating on January 1, 2003, bears to the total holding period. The remainder of the
gain realized will be subject to capital gains tax at the rates applicable to an asset
purchased after January 1, 2003 (see aforementioned).

Individual
and corporate shareholder dealing in securities in Israel are taxed at the tax rates
applicable to business income (in 2006  31% tax rate for a corporation and a
marginal tax rate of up to 49% for individual). Notwithstanding the foregoing, if the
shareholder is a non-Israeli resident, then such taxation is subject to the provision of
any applicable double tax treaty. Moreover, capital gain derived from the sale of the
Shares by a non-Israeli shareholder may be exempt under the Israeli income tax ordinance
from Israeli taxation provided the following cumulative conditions are met: (i) the Shares
were purchased upon or after the registration of the Shares at the stock exchange, (ii)
the seller doesnt have a permanent establishment in Israel to which the derived
capital gain is attributed, and (iii) if the seller is a corporation, less than 25% of its
means of control are held by Israeli resident shareholders. In addition, the sale of the
Shares may be exempt from Israeli capital gain tax under an applicable tax treaty. Thus,
the U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital gain tax in
connection with such sale, provided (i) the U.S. resident owned, directly or indirectly,
less than 10% of an Israeli resident companys voting power at any time within the 12
 month period preceding such sale; (ii) the seller, being an individual, is present
in Israel for a period or periods of less than 183 days at the taxable year; and (iii) the
capital gain from the sale was not derived through a permanent establishment of the U.S.
resident in Israel.

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

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

Dividends

A
distribution of dividend from income attributed to an Approved Enterprise will
be subject to tax in Israel at the rate of 15%, subject to a reduced rate under any
applicable double tax treaty. A distribution of dividend from income, which is not
attributed to an Approved Enterprise to an Israeli resident individual, will
generally be subject to income tax at a rate of 20%. However, a 25% tax rate will apply if
the dividend recipient is a Controlling Shareholder (i.e., a person who holds,
directly or indirectly, alone or together with other, 10% or more of one of the Israeli
resident companys means of control at the time of distribution or at any time during
the preceding 12 months period). If the recipient of the dividend is an Israeli resident
corporation, such dividend will be exempt from income tax provided the income from which
such dividend is distributed was derived or accrued within Israel.

Under
the Israeli income tax ordinance, a non-Israeli resident (either individual or
corporation) is generally subject to an Israeli income tax on the receipt of dividends at
the rate of 20% (25% if the dividends recipient is a Controlling Shareholder
(as defined above)); those rates are subject to a reduced tax rate under an applicable
double tax treaty. Thus, under the Double Tax Treaty concluded between the State of Israel
and the U.S. the following rates will apply in respect of dividends distributed by an
Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation
which holds during that portion of the taxable year which precedes the date of payment of
the dividend and during the whole of its prior taxable year (if any), at least 10% of the
outstanding shares of the voting stock of the Israeli resident paying corporation and not
more then 25% of the gross income of the Israeli resident paying corporation for such
prior taxable year (if any) consists of certain type of interest or dividends  the
tax rate is 12.5%, (ii) if both the conditions mentioned in section (i) above are met and
the dividend is paid from an Israeli resident companys income which was entitled to
a reduced tax rate applicable to an approved enterprise under the Israeli Law
for the Encouragement of Capital Investments of 1959 the tax rate is 15%, and (iii)
in all other cases, the tax rate is 25%. The aforementioned rates under the Israel U.S.
Double Tax Treaty will not apply if the dividend income was derived through a permanent
establishment of the U.S. resident in Israel.

An
Israeli resident company whose shares are listed in a stock exchange is obligated to
withhold tax, upon the distribution of a dividend attributed to an Approved
Enterprises income, from the amount distributed, at the following rates: (i) Israeli
resident corporation  15%, (ii) Israeli resident individual  15%, and (iii)
non-Israeli resident  15%, subject to a reduced tax rate under an applicable double
tax treaty. If the dividend is distributed from an income not attributed to the Approved
Enterprise, the following withholding tax rates will apply: (i) Israeli resident
corporation  0%, (ii) Israeli resident individual  20% (iii) non-Israeli
resident  20%, subject to a reduced tax rate under an applicable double tax treaty.

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.

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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 ordinary 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 ordinary 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 ordinary 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 ordinary 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.

# 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 (the Exchange Act). 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 100 F Street,
N.E., 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.

63

---

---

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 U.S. dollars and Euro but also in the currencies of the
United Kingdom, South Africa, Israel and other countries as well as other currencies.
Thus, we are exposed to foreign exchange movements, primarily in the United Kingdom, South
African, 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 hedge, from time to time, 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 U.S. dollar, our functional and reporting currency, against the Euro and
the NIS and other currencies. In 2006 we generated approximately 42% of our revenues in
dollars and 53% in Euros, and we incurred approximately 21% of our expenses in NIS, 23% in
dollars and 52% 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 U.S. 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, 2006, we had $36.5 million in current assets and $27.3 million in current
liabilities that are denominated in Euros. Additionally, we had $0.9 million in current
assets and $3.6 in current liabilities that are denominated in NIS.

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 ordinary shares in March 2005, we
changed the structure of our company from an A.C.S. into an Israeli corporation. 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 ordinary 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 ordinary
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 ordinary
shares with a par value of NIS 0.01 each. We also created authorized share capital of
100,000,000 ordinary 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 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 $2.6 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 $6.4 million to build our new production facilities in Kibbutz Shamir,
Israel;
| | - | ---------------------------------------------------------------------------------------------------

| |  | to
pay approximately $0.4 million in order to establish our new Israeli distributor, Shamir
Einit;
| | - | --------------------------------------------------------------------------------------------------

| |  | to
pay approximately $1.2 million for establishing our new subsidiary in France;
| | - | --------------------------------------------------------------------------------

| |  | to
pay approximately $0.7 million to expand our marketing and distribution network in the UK;
| | - | ---------------------------------------------------------------------------------------------

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

| |  | to
pay approximately $2.7 million to acquire 26% stake in our Mexican distributors; and
| | - | ---------------------------------------------------------------------------------------

| |  | to
pay approximately $0.8 million to acquire 25.8% stake in our Thai manufacture and
distributor.
| | - | -------------------------------------------------------------------------------------------------

65

---

---

We
expect to use the remaining net proceeds from the offering as follows to fund working
capital requirements and other general corporate purposes. 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 of our disclosure
controls and procedures, pursuant to Rule 13a-15 under the Securities Exchange Act of
1934, as amended (the Exchange Act), as of the end of the period covered by
this annual report. In
designing and evaluating our disclosure controls and procedures, we and our management
recognize that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating and implementing
possible controls and procedures. Nevertheless, our disclosure
controls and procedures are designed to provide reasonable assurance of achieving the
desired control objectives. Based on that evaluation, our chief executive officer and our
chief financial officer concluded that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act) were effective so as to provide reasonable assurance 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.

In
connection with the preparation of our financial statements, it came to our attention that
certain internal controls at one of our subsidiaries relating to transactions between the
subsidiary and a number of its officers required our review, although the relevant
transactions had been properly recorded on the books and records of the subsidiary. After
reviewing the facts and circumstances of these transactions, earlier this year we
clarified certain of our policies with respect to transactions with officers of the
Company and its subsidiaries and provided additional guidance to the local management of
our subsidiary as to the appropriate corporate bodies that must approve transactions with
officers.

Other
than as described above, there were no changes in our internal control over financial
reporting that occurred during the period covered by this report that has materially
affected, or are reasonably likely to materially affect, our internal control over
financial reporting.

# ITEM 16. [RESERVED]

# ITEM 16A. AUDIT
COMMITTEE FINANCIAL EXPERT

Our
board of directors has determined that Zeev 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 Global 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 attached as an exhibit to this annual report and is incorporated by
reference.

# 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, and to other global members of Ernst & Young
Global, for the fiscal years ended December 31, 2005 and 2006, are set below:

|Audit Fees Shamir  | 2005 | 2006
|------------------ | ---- | ----
|
|
|
|
|Audit fees         |      |     
|Audit-related fees |      |     
|Tax fees           |      |     
|Other fees         |      |     
|                   |      |     
|Total              |      |     
|                   |      |     

66

---

---

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.

On
April 26, 2007, the annual meeting of our shareholders approved the engagement of Kost
Forer Gabbay & Kasierer as our auditors for the period ending at the close of the next
annual general meeting.

Our
audit 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. The charter of the audit committee provides for a process with respect to the
prior approval of all services, including non-audit services, to be performed by the
independent auditors for Shamir.

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

---

---

# 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, 2005 and
2006, 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, 2005 and 2006                                                    | F-3-4  
|Consolidated Statements of Income for the years ended December 31, 2004, 2005 and 2006                          | F-5    
|Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2004, 2005 and 2006 | F-6    
|Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006                      | F-7-9  
|Notes to Consolidated Financial Statements                                                                      | F-10-49

# ITEM 19. EXHIBITS

See Exhibit Index.

68

---

---

# SHAMIR OPTICAL
INDUSTRY LTD. 
AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2006

# 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-49



---

---



# 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.
(the Company) and its subsidiaries (collectively Shamir) as of
December 31, 2005 and 2006, and the related consolidated statements of income,
shareholders equity and cash flows for each of the three years in the period ended
December 31, 2006. These financial statements are the responsibility of the Company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 the Company and its
subsidiaries as of December 31, 2005 and 2006, and the consolidated results of their
operations and cash flows for each of the three years in the period ended December 31,
2006, in conformity with accounting principles generally accepted in the United States.

As
discussed in Note 2 to the consolidated financial statements, in 2006, the Company
adopted Financial Accounting Standard Board Statement No. 123(R), Share-Based
Payment.

| | 
| | 

|Tel-Aviv, Israel
June 26, 2007 | KOST FORER GABBAY & KASIERER
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,
|----------------------------------------------------------------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                                                                              |             
|                                                                                                                                    |             
|CURRENT ASSETS:                                                                                                                     |             
|Cash and cash equivalents                                                                                                           |             
|Short-term investments                                                                                                              |             
|Trade receivables (net of allowance for doubtful accounts of $ 474 and 
    $ 1,053 at December 31, 2005 and 2006, respectively) *) |             
|Other receivables and prepaid expenses *)                                                                                           |             
|Inventory                                                                                                                           |             
|                                                                                                                                    |             
|                                                                                                                                    |             
|Total current assets                                                                                                                |             
|                                                                                                                                    |             
|                                                                                                                                    |             
|LONG-TERM INVESTMENTS:                                                                                                              |             
|Severance pay fund                                                                                                                  |             
|Loan to related party *)                                                                                                            |             
|Loan to others                                                                                                                      |             
|Investments in affiliates and others                                                                                                |             
|                                                                                                                                    |             
|                                                                                                                                    |             
|Total long-term investments                                                                                                         |             
|                                                                                                                                    |             
|                                                                                                                                    |             
|PROPERTY, PLANT AND EQUIPMENT, NET                                                                                                  |             
|                                                                                                                                    |             
|                                                                                                                                    |             
|OTHER ASSETS                                                                                                                        |             
|                                                                                                                                    |             
|                                                                                                                                    |             
|GOODWILL                                                                                                                            |             
|                                                                                                                                    |             
|                                                                                                                                    |             
|Total assets                                                                                                                        |             
|                                                                                                                                    |             

*) See Note 17
Transaction with Related Parties

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,
|------------------------------------------------------------------------------------------------------------------------------------------------ | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                             |             
|                                                                                                                                                 |             
|CURRENT LIABILITIES:                                                                                                                             |             
|Short-term bank credit and loans                                                                                                                 |             
|Current maturities of long-term loans and capital leases                                                                                         |             
|Trade payables                                                                                                                                   |             
|Accrued expenses and other liabilities *)                                                                                                        |             
|                                                                                                                                                 |             
|                                                                                                                                                 |             
|Total current liabilities                                                                                                                        |             
|                                                                                                                                                 |             
|                                                                                                                                                 |             
|LONG-TERM LIABILITIES:                                                                                                                           |             
|Long-term loans                                                                                                                                  |             
|Capital leases                                                                                                                                   |             
|Accrued severance pay                                                                                                                            |             
|Deferred tax liabilities                                                                                                                         |             
|                                                                                                                                                 |             
|                                                                                                                                                 |             
|Total long-term liabilities                                                                                                                      |             
|                                                                                                                                                 |             
|                                                                                                                                                 |             
|MINORITY INTERESTS                                                                                                                               |             
|                                                                                                                                                 |             
|                                                                                                                                                 |             
|COMMITMENTS AND CONTINGENT LIABILITIES (Note 14)                                                                                                 |             
|                                                                                                                                                 |             
|SHAREHOLDERS' EQUITY:                                                                                                                            |             
|Share capital-                                                                                                                                   |             
|Ordinary shares of NIS 0.01 par value:                                                                                                           |             
|Authorized: 100,000,000 shares at December 31, 2005 and 2006;
      Issued and outstanding: 16,256,514 shares
      at December 31,2005 and 2006 |             
|Additional paid-in capital                                                                                                                       |             
|Deferred stock compensation                                                                                                                      |             
|Accumulated other comprehensive income                                                                                                           |             
|Retained earnings                                                                                                                                |             
|                                                                                                                                                 |             
|                                                                                                                                                 |             
|Total shareholders' equity                                                                                                                       |             
|                                                                                                                                                 |             
|                                                                                                                                                 |             
|Total liabilities and shareholders' equity                                                                                                       |             
|                                                                                                                                                 |             

*) See Note 17
Transaction with Related Parties

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,
|------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues, net *)                                        |                        
|Cost of revenues *)                                     |                        
|                                                        |                        
|                                                        |                        
|Gross profit                                            |                        
|                                                        |                        
|                                                        |                        
|Operating expenses:                                     |                        
|Research and development                                |                        
|Selling and marketing                                   |                        
|General and administrative                              |                        
|                                                        |                        
|                                                        |                        
|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):                             |                        
|Pro forma - additional taxes on income                  |                        
|                                                        |                        
|Pro forma net income                                    |                        
|                                                        |                        
|                                                        |                        
|Net earnings per share:                                 |                        
|Basic                                                   |                        
|                                                        |                        
|Diluted                                                 |                        
|                                                        |                        
|                                                        |                        
|Pro forma net earnings per share (unaudited) (Note 2r): |                        
|Basic                                                   |                        
|                                                        |                        
|Diluted                                                 |                        
|                                                        |                        

*)
          See Note 17  Transaction with related Parties.

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 | Share
capital | Additional
paid-in
capital | Deferred
stock compensation | Accumulated other
comprehensive
income | Retained
earnings | Total
comprehensive
income | Total
shareholders'
equity
|------------------------------------------------------------------------------------------------- | ---------------- | ------------- | -------------------------- | --------------------------- | -------------------------------------- | ----------------- | -------------------------- | --------------------------
|
|
|
|
|Balance as of January 1, 2004                                                                     |                  |               |                            | 12,047,971                  |                                        | $                 | 29                         |                           
|Distribution of earnings to shareholders                                                          |                  |               |                            | -                           |                                        |                   | -                          |                           
|Issuance of shares, net                                                                           |                  |               |                            | 160,961                     |                                        |                   | *) -                       |                           
|Classification of liability into   temporary equity and exercise of call option                   |                  |               |                            | 502,400                     |                                        |                   | *) -                       |                           
|Reclassification of puttable shares into   temporary equity                                       |                  |               |                            | (502,400                    | )                                      |                   | *) -                       |                           
|Deferred stock compensation related to   grant of options to employees                            |                  |               |                            | -                           |                                        |                   | -                          |                           
|Amortization of deferred stock   compensation                                                     |                  |               |                            | -                           |                                        |                   | -                          |                           
|Comprehensive income:                                                                             |                  |              
|Foreign currency translation     adjustments                                                      |                  |               |                            | -                           |                                        |                   | -                          |                           
|Net income                                                                                        |                  |               |                            | -                           |                                        |                   | -                          |                           
|                                                                                                  |                  |               |                            |                             |                                        |                   |                            |                           
|Total comprehensive income                                                                        |                  |               |                            |                             |                                        |                   |                            |                           
|                                                                                                  |                  |               |                            |                             |                                        |                   |                            |                           
|Balance as of December 31, 2004                                                                   |                  |               |                            | 12,208,932                  |                                        |                   | 29                         |                           
|Issuance of shares, net in the IPO                                                                |                  |               |                            | 3,400,000                   |                                        |                   | 8                          |                           
|Issuance of shares in respect of   acquisition of additional share of SII                         |                  |               |                            | 145,182                     |                                        |                   | *) -                       |                           
|Reclassification of puttable shares from   temporary equity                                       |                  |               |                            | 502,400                     |                                        |                   | *) -                       |                           
|Reclassification of retained earnings into   additional paid-in capital due to     reorganization |                  |               |                            | -                           |                                        |                   | -                          |                           
|Deferred stock compensation related to   grant of options to employees                            |                  |               |                            | -                           |                                        |                   | -                          |                           
|Amortization of deferred stock   compensation                                                     |                  |               |                            | -                           |                                        |                   | -                          |                           
|Compensation expenses in respect of   options granted on subsidiary's share                       |                  |               |                            | -                           |                                        |                   | -                          |                           
|Comprehensive income:                                                                             |                  |              
|Foreign currency translation     adjustments                                                      |                  |               |                            | -                           |                                        |                   | -                          |                           
|Net income                                                                                        |                  |               |                            | -                           |                                        |                   | -                          |                           
|                                                                                                  |                  |               |                            |                             |                                        |                   |                            |                           
|Total comprehensive income                                                                        |                  |               |                            |                             |                                        |                   |                            |                           
|                                                                                                  |                  |               |                            |                             |                                        |                   |                            |                           
|Balance as of December 31, 2005                                                                   |                  |               |                            | 16,256,514                  |                                        |                   | 37                         |                           
|Reclassification of deferred stock 
  compensation due to implementation   of SFAS 123(R)         |                  |               |                            | -                           |                                        |                   | -                          |                           
|Stock based compensation related to   options granted to employees   and consultants              |                  |               |                            | -                           |                                        |                   | -                          |                           
|Comprehensive income:                                                                             |                  |              
|Foreign currency translation     adjustments                                                      |                  |               |                            | -                           |                                        |                   | -                          |                           
|Unrealized loss on short-term     investments, net of tax                                         |                  |               |                            | -                           |                                        |                   | -                          |                           
|Net income                                                                                        |                  |               |                            | -                           |                                        |                   | -                          |                           
|                                                                                                  |                  |               |                            |                             |                                        |                   |                            |                           
|Total comprehensive income                                                                        |                  |               |                            |                             |                                        |                   |                            |                           
|                                                                                                  |                  |               |                            |                             |                                        |                   |                            |                           
|Balance as of December 31, 2006                                                                   |                  |               |                            | 16,256,514                  |                                        | $                 | 37                         |                           
|                                                                                                  |                  |               |                            |                             |                                        |                   |                            |                           

|*) | Represent
an amount less than $ 1.
|-- | ----------------------------------

|**) | The
full amount represents foreign currency translation adjustments.
|--- | --------------------------------------------------------------------

|***) | Represent
an amount of $ 977 foreign currency translation adjustment and $ (19)           loss on
short-term investment, net of tax.
|---- | ------------------------------------------------------------------------------------------------------------------------------------

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,
|-------------------------------------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from operating activities:                                                  |                        
|                                                                                       |                        
|Net income                                                                             |                        
|Adjustments required to reconcile net income to net cash used in operating activities: |                        
|Depreciation and amortization                                                          |                        
|Stock based compensation                                                               |                        
|Accrued severance pay, net                                                             |                        
|Currency fluctuations of long-term loans                                               |                        
|Decrease (increase) in deferred tax assets, net                                        |                        
|Equity in losses of affiliates, net                                                    |                        
|Minority interest in earnings (losses) of subsidiaries                                 |                        
|Interest receivable on marketable securities                                           |                        
|Foreign currency translation  losses (gains)                                           |                        
|Increase in trade receivables                                                          |                        
|Increase in other receivables and prepaid expenses                                     |                        
|Increase in inventory                                                                  |                        
|Increase (decrease) in trade payables                                                  |                        
|Increase in accrued expenses and other liabilities                                     |                        
|Others                                                                                 |                        
|                                                                                       |                        
|                                                                                       |                        
|Net cash provided by (used in) operating activities                                    |                        
|                                                                                       |                        
|                                                                                       |                        
|Cash flows from investing activities:                                                  |                        
|                                                                                       |                        
|Loans granted to affiliates                                                            |                        
|Loans granted to others                                                                |                        
|Investment in affiliates                                                               |                        
|Acquisition of Eyal (a)                                                                |                        
|Acquisition of Cambridge (b)                                                           |                        
|Acquisition of Interoptic                                                              |                        
|Acquisition of Altra Turkey (c)                                                        |                        
|Acquisition of additional shares in SII                                                |                        
|Acquisition of Spherical Optics (d)                                                    |                        
|Acquisition of Shamir Or                                                               |                        
|Purchase of property, plant and equipment                                              |                        
|Government participation in purchase of property, plant and equipment                  |                        
|Proceeds from sale of property and equipment                                           |                        
|Loan granted to related party                                                          |                        
|Repayment of loan by related party                                                     |                        
|Purchase of short-term investments                                                     |                        
|Proceeds from sale of short-term investments                                           |                        
|                                                                                       |                        
|                                                                                       |                        
|Net cash used in investing activities                                                  |                        
|                                                                                       |                        

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,
|------------------------------------------------------------------------------------------ | -----------------------
|
|
|
|
|Cash flows from financing activities:                                                      |                        
|                                                                                           |                        
|Distribution of earnings to shareholders                                                   |                        
|Short-term bank credit and loans, net                                                      |                        
|Proceeds from exercise of call option                                                      |                        
|Issuance of shares, net                                                                    |                        
|Receipt of long-term loans                                                                 |                        
|Repayment of long-term loans                                                               |                        
|Repayment of long-term loans in capital lease                                              |                        
|Dividend paid to minority by a subsidiary                                                  |                        
|                                                                                           |                        
|                                                                                           |                        
|Net cash provided by (used in)  financing activities                                       |                        
|                                                                                           |                        
|                                                                                           |                        
|Effect of exchange rate differences on cash and cash equivalents                           |                        
|                                                                                           |                        
|                                                                                           |                        
|Increase (decrease) in cash and cash equivalents                                           |                        
|Cash and cash equivalents at beginning of year                                             |                        
|                                                                                           |                        
|                                                                                           |                        
|Cash and cash equivalents at end of year                                                   |                        
|                                                                                           |                        
|                                                                                           |                        
|Supplemental information and disclosures of non-cash   investing and financing activities: |                        
|                                                                                           |                        
|Issuance of shares as partial consideration of SII acquisition                             |                        
|                                                                                           |                        
|                                                                                           |                        
|Deferred tax benefit on offering expense                                                   |                        
|                                                                                           |                        
|                                                                                           |                        
|Purchase of property, plant and equipment in capital lease                                 |                        
|                                                                                           |                        
|                                                                                           |                        
|Additional consideration on SII acquisition (see note 1e)                                  |                        
|                                                                                           |                        
|                                                                                           |                        
|Long-term loan written off (see note 1c)                                                   |                        
|                                                                                           |                        
|                                                                                           |                        
|Distribution of earnings not yet paid                                                      |                        
|                                                                                           |                        
|                                                                                           |                        
|Cash paid during the period for:                                                           |                        
|                                                                                           |                        
|Interest                                                                                   |                        
|                                                                                           |                        
|                                                                                           |                        
|Income taxes                                                                               |                        
|                                                                                           |                        

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,
|--- | ------------------------------------------------------------------------------ | -----------------------
|
|
|
|
|(a) | Acquisition of Eyal:                                                           |                        
|    |                                                                                |                        
|    | Fair value of assets acquired and liabilities assumed at the acquisition date: |                        
|    |                                                                                |                        
|    | Working capital (excluding cash and cash equivalents)                          |                        
|    |                                                                                |                        
|(b) | Acquisition of Cambridge:                                                      |                        
|    |                                                                                |                        
|    | Fair value of assets acquired and liabilities assumed at the acquisition date: |                        
|    |                                                                                |                        
|    | Working capital (excluding cash and cash equivalents)                          |                        
|    | Long-term deferred tax assets                                                  |                        
|    | Property and equipment                                                         |                        
|    | Other intangible assets                                                        |                        
|    | Goodwill                                                                       |                        
|    | Long-term loans                                                                |                        
|    | Long-term deferred tax liabilities                                             |                        
|    |                                                                                |                        
|    |                                                                                |                        
|    |                                                                                |                        
|    |                                                                                |                        
|(c) | Acquisition of Altra Turkey                                                    |                        
|    |                                                                                |                        
|    | Estimated fair value of assets acquired at the acquisition date:               |                        
|    |                                                                                |                        
|    | Working capital (excluding cash and cash equivalents)                          |                        
|    | Property and equipment                                                         |                        
|    | Other intangible assets                                                        |                        
|    | Goodwill                                                                       |                        
|    |                                                                                |                        
|    |                                                                                |                        
|    |                                                                                |                        
|    |                                                                                |                        
|(d) | Acquisition of Spherical Optics (PTY) Ltd.                                     |                        
|    |                                                                                |                        
|    | Estimated fair value of assets acquired at the acquisition date:               |                        
|    |                                                                                |                        
|    | Working capital (excluding cash and cash equivalents)                          |                        
|    | Property and equipment                                                         |                        
|    | Other intangible assets                                                        |                        
|    | Goodwill                                                                       |                        
|    | Long-term deferred tax liabilities                                             |                        
|    | Minority interest                                                              |                        
|    |                                                                                |                        
|    |                                                                                |                        
|    |                                                                                |                        
|    |                                                                                |                        

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. (the Company) was incorporated under the laws of the
State of Israel in the early 1970s. Shamir and its subsidiaries (collectively Shamir)
design, develop, manufacture and market optical progressive and other lenses and molds.
Shamir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 (Altra) 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 ordinary 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 its 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 Shamirs products,
are available from a limited number of suppliers. Shamir 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 Shamir to obtain these
raw materials elsewhere. If Shamir is unable to obtain glass blanks or monomers from its
suppliers (or alternative suppliers) at acceptable prices, Shamir may realize lower
margins and experience difficulty in meeting its customers requirements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Acquisition
of Eyal Optical Industries (1998) Ltd. (Eyal):
| | -- | ------------------------------------------------------------

| | Up
until the fourth quarter of 2003, the Company 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, the Company entered into an agreement with Kibbutz
Eyal to purchase an 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, the Company issued to the seller a Call option (the
Call option) to purchase 502,400 shares of the Company for a total exercise
price of $ 2,000, exercisable through January 10, 2004. In addition, the Company
granted a Put option (the Put option) to the seller to sell the underlying
shares (upon exercise of the Call option) back to the Company 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 the Company. On March 16, 2005, upon the IPO, the Put
option expired.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 the Company 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 Company recorded an amount of $ 3,000 as temporary equity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
following table summarizes the fair values of the assets acquired and the buyout of the
minority interest:
| | --------------------------------------------------------------------------------------------------------------

| |                          | 
| | ------------------------ | 
|
|
|
|
| | Current assets           | 
| | Technology               | 
| | Customer relationship    | 
| | Goodwill                 | 
| |                          | 
| |                          | 
| | Total assets acquired    | 
| |                          | 
| |                          | 
| | Minority interest buyout | 
| |                          | 
| |                          | 
| |                          | 
| |                          | 

| | Acquired
other intangible assets in the amount of $ 579 with definite lives are amortized using
the straight-line method at an annual weighted average rate of approximately 17%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 3, 2004, Shamir acquired the remaining 2% of Eyals shares in consideration for $ 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, 2006, 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 Shamir starting August 31, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
the acquisition of Cambridge, Shamir expanded its customer base and its presence in
Europe.
| | ------------------------------------------------------------------------------------------------

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.)
|------- | - | ---------------

| | The
following table summarizes the fair values of the assets acquired and liabilities
assumed:
| | ----------------------------------------------------------------------------------------------

| |                                  | 
| | -------------------------------- | 
|
|
|
|
| | Current assets                   | 
| | Long-term deferred tax assets    | 
| | Property and equipment           | 
| | Technology                       | 
| | Customer relationship            | 
| | Goodwill                         | 
| |                                  | 
| |                                  | 
| | Total assets acquired            | 
| |                                  | 
| |                                  | 
| | Current liabilities              | 
| | Long-term loan                   | 
| | Long-term deferred tax liability | 
| |                                  | 
| |                                  | 
| | Total liabilities assumed        | 
| |                                  | 
| |                                  | 
| | Net assets acquired              | 
| |                                  | 

| | Acquired
other intangible assets in the amount of $ 888 with definite lives are amortized using
the straight-line method at an annual weighted average rate of 23%.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2006, part of the long-term loan that was part of the liabilities assumed was written
off. Accordingly the goodwill was reduced by $ 355.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | During
August 2006, Cambridge changed its registered name to Shamir UK Ltd.
| | ---------------------------------------------------------------------------

| | The
following represents the unaudited pro-forma condensed results of operations for the year
ended December 31, 2004, assuming that the acquisition occurred on January 1, 2004.
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,
2004
| | ------------------------------ | ----------------------------
|
|
|
|
| | Revenues, net                  |                             
| |                                |                             
| |                                |                             
| | Net income                     |                             
| |                                |                             
| |                                |                             
| | Basic net earnings per share   |                             
| |                                |                             
| |                                |                             
| | Diluted net earnings per share |                             
| |                                |                             
| |                                |                             

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 established a new Turkish optical subsidiary, Altra Optik Sanayi ve
Ticaret A.S. (Altra Turkey). Altra Turkey acquired all the assets of Emin
Optic, a Turkish company that engaged in the business of producing spectacle lenses.
Altra Turkey 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 operations have been included in the
consolidated financial statements of Shamir starting June 30, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
the establishment of Altra Turkey, Shamir expanded its customer base and its presence in
Europe.
| | -----------------------------------------------------------------------------------------------------

| | The
following table summarizes the fair values of the assets acquired:
| | ----------------------------------------------------------------------

| |                        | 
| | ---------------------- | 
|
|
|
|
| | Inventory              | 
| | Property and equipment | 
| | Technology             | 
| | Customer relationship  | 
| | Non-competition        | 
| | Goodwill               | 
| |                        | 
| |                        | 
| | Total assets acquired  | 
| |                        | 

| | 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%.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pro-forma
information was not provided due to immateriality.
| | ------------------------------------------------------------

| | 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 the Company. 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
additional consideration in respect of 2006 earnings is $ 449, and as of December 31,
2006, the goodwill increased accordingly.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | 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 fair values of the assets acquired, liabilities assumed
and the buyout of the minority interest as of the acquisition date:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | 
| | -------------------------------- | 
|
|
|
|
| | Distribution channels            | 
| | Trade name                       | 
| | Goodwill                         | 
| |                                  | 
| |                                  | 
| | Total assets acquired            | 
| |                                  | 
| |                                  | 
| | Long-term deferred tax liability | 
| |                                  | 
| |                                  | 
| | Net assets acquired              | 
| |                                  | 
| |                                  | 
| | Minority interests buyout        | 
| |                                  | 
| |                                  | 
| |                                  | 
| |                                  | 

| | 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%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pro-forma
information was not provided due to immateriality.
| | ------------------------------------------------------------

| | f. | Acquisition
of Spherical Optics (PTY) Ltd.:
| | -- | -------------------------------------------

| | On
January 2, 2006, the Company acquired 51% of the share capital and ownership interest of
Spherical Optics (PTY) Ltd. (Spherical), a South African optical lenses
distribution company. The Company paid 5.4 million Rand ($ 855).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 Sphericals operations have been included in the
consolidated financial statements of Shamir starting January 2, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | With
the acquisition of Spherical, Shamir expanded its customer base and its presence in South
Africa.
| | ------------------------------------------------------------------------------------------------------

| | The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed:
| | --------------------------------------------------------------------------------------------------------

| |                                  | 
| | -------------------------------- | 
|
|
|
|
| | Current assets                   | 
| | Property and equipment           | 
| | Long-term deferred tax assets    | 
| | Customer relationship            | 
| | Goodwill                         | 
| |                                  | 
| |                                  | 
| | Total assets acquired            | 
| |                                  | 
| |                                  | 
| | Current liabilities              | 
| | Long-term deferred tax liability | 
| |                                  | 
| |                                  | 
| | Total liabilities assumed        | 
| |                                  | 
| |                                  | 
| | Net assets acquired              | 
| |                                  | 
| |                                  | 
| | Minority interest                | 
| |                                  | 
| |                                  | 
| | Total Purchase Price             | 
| |                                  | 

| | Acquired
other intangible assets in the amount of $ 633 with definite lives are amortized using
the straight-line method at an annual rate of 14%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | Pro-forma
information was not provided due to immateriality.
| | ------------------------------------------------------------

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

| | b. | Financial
statements in U.S. dollars:
| | -- | -------------------------------------

| | The
functional currency of the Company and certain subsidiaries is the U.S. dollar (dollar),
as the dollar is the primary currency of the economic environment in which the Company
and certain subsidiaries have operated and expect to continue to operate in the
foreseeable future. The reporting currency of Shamir is the dollar.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------- | - | ---------------------------------------

| | 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 the Company and its wholly and
majority owned subsidiaries. Intercompany transactions and balances, including profit
from intercompany sales not yet realized outside Shamir, 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
investments:
| | -- | -----------------------

| | Consist
of:
| | -----------

| | 1) | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Available
for sale marketable securities:
| | -- | -----------------------------------------

| | Management
determines the classification of investments in debt securities with fixed maturities at
the time of purchase and reevaluates such designations as of each balance sheet date. At
December 31, 2006 and 2005, all marketable securities covered by Statement of Financial
Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS No. 115) were designated as available-for-sale.
Accordingly, these securities are stated at fair value, with unrealized gains and losses,
net of tax, reported in accumulated other comprehensive income (loss), a separate
component of shareholders equity. The amortized cost of available-for-sale
securities is adjusted for amortization of premiums to maturity. Such amortization and
interest are included in financial income (expenses) and other, net.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------- | - | ---------------------------------------

| | FASB
Staff Position (FSP) No. 115-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investment (FSP 115-1) provides
guidance for determining when an investment is considered impaired, whether impairment is
other-than-temporary, and measurement of an impairment loss. An investment is considered
impaired if the fair value of the investment is less than its cost. If, after
consideration of all available evidence to evaluate the realizable value of its
investment, impairment is determined to be other-than-temporary, then an impairment loss
should be recognized equal to the difference between the investments cost and its
fair value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 and others:
| | -- | -------------------------------------

| | Affiliated
companies are companies held to the extent of 20% or more (which are not subsidiaries),
over which Shamir can exercise significant influence on their operating and financial
policies.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
investment in affiliated companies is accounted for by the equity method. Profits on intercompany
sales, not realized outside the group, were eliminated. The excess of the purchase price
over the proportional fair value of net tangible assets of the investee is attributed to
goodwill and other identifiable intangible assets. Other identifiable intangible assets
are amortized over a weighted averaged period of approximately 11 years, commencing from
the acquisition date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Goodwill
embedded in an equity method investment is not amortized. Instead it is subject to other
than temporary impairment assessment together with the entire carrying value of the
investment.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments
in companies in which the Shamir holds less than 20% is stated at cost, since Shamir does
not have the ability to exercise significant influence over operating and financial
policies of those investees. Shamirs investments in these companies are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying
amount of an investment may not be recoverable, in accordance with Accounting Principle
Board Opinion No.18 The Equity Method of Accounting for Investments in Common Stock,
(APB No.18). As of December 31, 2006, no impairment losses have been
identified.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------- | - | ---------------------------------------

| | 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 |  
| | Furniture and office equipment        |  
| | Motor vehicles                        |  
| | Buildings                             |  

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

| | Fixed
assets under a capital lease are stated as assets of Shamir on the basis of ordinary
purchase prices (without the component of financing), and they are depreciated according
to the usual rates of depreciation applicable to such assets. The lease payments payable
in the forthcoming years, net of the interest component included in them are included in
liabilities. The interest in respect of such amounts is accrued on a current basis and is
charged to earnings.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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            |                    
| | Customer relationship |                    
| | Non competition       |                    
| | Distribution channels |                    
| | Trade name            |                    

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.)
|------- | - | ---------------------------------------

| | j. | Impairment
of long-lived assets:
| | -- | --------------------------------

| | Shamir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, 2006, no impairment losses have been
identified.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | k. | Goodwill:
| | -- | ---------

| | Goodwill
represents excess of the costs over the net assets of businesses acquired. SFAS No. 142
prescribes a two-phase process for impairment testing of goodwill. The first phase
screens for impairment, while the second phase (if necessary) measures impairment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the first phase of impairment testing, goodwill attributable to each of the reporting
units is tested for impairment by comparing the fair value of each reporting unit with
its carrying value. If the carrying value of the reporting unit exceeds its fair value,
the second phase is then performed. The second phase of the goodwill impairment test
compares the implied fair value of the reporting units goodwill with the carrying
amount of that goodwill. If the carrying amount of the reporting units goodwill
exceeds the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Goodwill
attributable to Shamirs single reporting unit as defined under SFAS No. 142, was
tested for impairment by comparing its fair value with its carrying value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair
value is determined using Shamirs market capitalization. Shamir performs the
impairment tests during the fourth fiscal quarter. As of December 31, 2006, no impairment
losses have been identified.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Revenue
recognition:
| | -- | --------------------

| | Shamir
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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shamir
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)".
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------- | - | ---------------------------------------

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

| | Amounts
billed to customers for shipping and handling costs are classified as revenues in the
consolidated statements of income with the associated costs included as a component of
cost of revenues.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 the Company in the
comparative figures in these financial statements, since the tax effects of the Companys
income were passed through to the individual shareholders. 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shamir
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. Shamir 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,
2004, 2005 and 2006, were $ 2,080, $ 1,851 and $ 2,964, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Concentrations
of credit risk:
| | -- | ------------------------------

| | Financial
instruments that potentially subject Shamir to concentrations of credit risk consist
principally of cash and cash equivalents, short-term investments and trade receivables.
The majority of Shamirs cash and cash equivalents 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 Shamirs investments are financially sound
and accordingly, minimal credit risk exists with respect to these investments. Shamirs
short-term investments include investments in debentures of U.S. Agencies and Corporation
and other securities Management believes that those organizations are financially sound,
and accordingly, minimal credit risk exists with respect to these marketable securities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------- | - | ---------------------------------------

| | Shamirs
trade receivables are derived from sales to customers located mainly in the U.S. and
Europe. Shamir performs ongoing credit evaluations of its customers and to date has not
experienced any material losses. In certain circumstances, Shamir may require letters of
credit or prepayments. An allowance for doubtful accounts is determined with respect to
those amounts that Shamir has determined to be doubtful of collection. Provisions for
doubtful accounts were recorded in general and administrative expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shamir
from time to time enters into forward contracts and option strategies (together: derivative
instruments) intended to protect against changes in foreign currencies. Shamir has
also entered into interest-rate swaps. 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:
| | -- | --------------

| | Shamirs
liability for severance pay is calculated pursuant to Israeli Severance Pay Law based on
the most recent salary of Shamirs Israeli employees multiplied by the number of
years of employment, as of the balance sheet date. These employees are entitled to one
months salary for each year of employment or a portion thereof. Shamir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, 2004, 2005 and 2006, amounted to $ 388, $ 463
and $ 504, 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 0, 357,416 and 1,331,660 for the years ended December 31, 2004, 2005
and 2006, 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 - 21

---

---



|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:
| | -- | ----------------------------------------

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

| | Effective
January 1, 2006, Shamir adopted SFAS No. 123(R) using the modified prospective transition
method. Under that transition method, compensation cost recognized in the year ended
December 31, 2006, includes: (a) compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123(R). Results for prior periods have not been restated, in accordance with the
modified prospective transition method.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of adopting SFAS No. 123(R) on January 1, 2006, Shamirs income before
taxes on income and net income for the year ended December 31, 2006, is $ 1,125, lower,
than if it had continued to account for share-based compensation under APB 25. Basic and
diluted net income per share for the year ended December 31, 2006, are $ 0.07 lower, than
if Shamir had continued to account for share based compensation under APB 25.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 123(R) requires companies to estimate the fair value of equity-based payment awards
on the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the requisite
service periods in Shamirs consolidated income statements. Prior to the adoption of
SFAS No. 123(R), Shamir accounted for equity-based awards to employees and directors
using the intrinsic value method in accordance with APB No. 25 as allowed under Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123). Under the intrinsic value, equity-based compensation recognized for the
years ended December 31, 2004 and 2005 was $82 and $608 (including minority share related
to SII options in the amount of $ 110), respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---



|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
following table illustrates the effect on net income and earnings per share if Shamir had
applied the fair value recognition provisions of SFAS No. 123 to options granted under
Shamirs stock option plans in all periods presented. For purposes of this pro forma
disclosure, the value of the options is estimated using a Black-Scholes option-pricing
formula and amortized to expense over the options vesting periods.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                                                                           | Year ended December 31,
| | --------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|
| | Net income as reported                                                                                                                                    |                        
| | Add: stock-based compensation expenses, net of minority share                                                                                             |                        
| | related to SII options, included in the reported net income                                                                                               |                        
| | Deduct: Total stock-based compensation expenses determined
  under fair value based method for all awards, net of minority
  share related to SII options |                        
| |                                                                                                                                                           |                        
| |                                                                                                                                                           |                        
| | Pro forma net  income                                                                                                                                     |                        
| |                                                                                                                                                           |                        
| |                                                                                                                                                           |                        
| | Earnings per share                                                                                                                                        |                        
| | Basic net earnings per share- as reported                                                                                                                 |                        
| |                                                                                                                                                           |                        
| | Basic net earning per share - pro forma                                                                                                                   |                        
| |                                                                                                                                                           |                        
| | Diluted net earning per share- as reported                                                                                                                |                        
| |                                                                                                                                                           |                        
| | Diluted net earning per share- pro forma                                                                                                                  |                        
| |                                                                                                                                                           |                        

| | The
fair value for these options was estimated at the date of grant using the Black and
Scholes option pricing model based on the following weighted-average assumptions:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         | 2004 | 2005
| | ----------------------- | ---- | ----
|
|
|
|
| | Dividend yield          |      |     
| | Expected volatility     |      |     
| | Risk-free interest rate |      |     
| | Expected life (years)   |      |     

| | Shamir
estimates the fair value of stock options granted to employees and directors under SFAS
No. 123(R) using the Black-Scholes option- pricing model that uses the assumption noted
in the following table.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Expected
volatility was calculated based upon actual historical stock price movements of similar
traded companies The expected term of options granted represent the period of time that
options granted are expected to be outstanding and was determined based on the simplified
method, average of vesting and contractual term of Shamirs stock options, in
accordance with SAB 107. The risk free interest rate is based on the yield of U.S
Treasury bonds with equivalent terms. The dividend yield is based on the Companys
historical and future expectation of dividends payouts.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---



|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.)
|------- | - | ---------------------------------------

| | Shamir
recognizes compensation expense for the value of its awards based on the straight line
method over the requisite service period of each of the awards, net of estimated
forfeitures at the time of grant. Estimated forfeitures are based on historical pre-
vesting forfeitures. SFAS 123(R) requires forfeitures to be estimated and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of Shamirs stock options granted to employees and directors for the year
ended December 31, 2006, was estimated using the following assumptions:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         | Year ended
December 31,
2006 | 
| | ----------------------- | ---------------------------- | 
|
|
|
|
| | Expected volatility     | 26.98% - 27.47%              | 
| | Risk-free interest rate | 4.92% - 5.1%                 | 
| | Dividend yield          | 0                            | 
| | Forfeiture rate         | 0                            | 
| | Expected life (years)   | 3.79 - 4.58                  | 

| | Shamir
had accounted for its options to consultants under the fair value method of SFAS No. 123
and EITF 96-18. The fair value for these options was estimated using a Black-Scholes
option-pricing model with the following weighted-average assumptions for 2006: risk-free
interest rate of 4.70%, dividend yields of 0%, expected volatility of 25.93% and
contractual life of 6.50.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shamirs
aggregate compensation cost for the year ended December 31, 2006, totaled $ 1,426
thousand (including $ 30 related to options to non-employees).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                                                                     | Year ended
December 31,
| | ------------------------------------------------------------------- | -----------------------
|
|
|
|
| | Research and development *)                                         |                        
| | Sales and Marketing **)                                             |                        
| | General and administrative                                          |                        
| |                                                                     |                        
| |                                                                     |                        
| | Total equity-based compensation expense                             |                        
| |                                                                     |                        
| |                                                                     |                        
| | Net equity-based compensation expense, per share of ordinary stock: |                        
| | Basic                                                               |                        
| |                                                                     |                        
| |                                                                     |                        
| | Diluted                                                             |                        
| |                                                                     |                        

| | *) | Including
$ 30 related to options to non-employees (see note 16)
| | -- | ----------------------------------------------------------------

| | **) | The
options granted do not require any performance criteria and no           consideration
was received in return for the options.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---



|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.)
|------- | - | ---------------------------------------

| | A
summary of option activity under Shamirs stock option plans as of December 31,
2006, and changes during year than ended are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------

| |                                                  | Number of options | Weighted-average
exercise price | Weighted- average
remaining
contractual term
(in years) | Aggregate
intrinsic value
as of December
31,2006
| | ------------------------------------------------ | ----------------- | ------------------------------- | ------------------------------------------------------- | ------------------------------------------------
|
|
|
|
| | Outstanding at January 1, 2006                   |                   |                                 |                                                         | 1,497,159                                       
| | Granted *)                                       |                   |                                 |                                                         | 383,000                                         
| | Exercised                                        |                   |                                 |                                                         | -                                               
| | Forfeited                                        |                   |                                 |                                                         | (33,486                                         
| |                                                  |                   |                                 |                                                         |                                                 
| |                                                  |                   |                                
| | Outstanding at December  31, 2006 *)             |                   |                                 |                                                         | 1,846,673                                       
| |                                                  |                   |                                 |                                                         |                                                 
| |                                                  |                   |                                
| | Exercisable at December 31, 2006                 |                   |                                 |                                                         | 845,437                                         
| |                                                  |                   |                                 |                                                         |                                                 
| |                                                  |                   |                                
| | Vested and expected to vest at December 31, 2006 |                   |                                 |                                                         | 1,846,673                                       
| |                                                  |                   |                                 |                                                         |                                                 

| | *)
Includes 70,000 options to non-employees with a weighted average exercise price
          of $9.82, and a weighted average remaining contractual term of 6.38 years as of
          December 31, 2006. As of December 31, 2006 none of these options are vested and
          all the remaining options are expected to vest in the future (see note 16).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
aggregate intrinsic value in the table above represents the total intrinsic value (the
difference between the Companys closing stock price on the last trading day of the
fourth quarter of fiscal 2006 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had all option
holders exercised their options on December 31, 2006
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted-average grant-date fair value of options granted during the years ended December
31, 2004, 2005 and 2006, was $ 3.83, $ 4.99 and $ 3.00, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2004, 2005 and 2006, was $
0.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, there was $ 2,656 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under Shamirs
stock option plans (including $161 related to options to non-employees). That cost is
expected to be recognized over a weighted average period of 2.4 years. The total fair
value of options vested during the year ended December 31, 2006, was $1,568 (including $0
related to options to non-employees).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---



|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 Shamir 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
marketable securities included in short-term investments is based on quoted market prices
and does not differ significantly from the carrying amount. 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Impact
of recently issued accounting standards:
| | -- | -----------------------------------------------

| | In
June 2006, the Financial Accounting Standard Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48)  See Note 20.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, Fair
Value Measurements (SFAS No. 157), which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS No. 157 applies
to other accounting pronouncements that require or permit fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Shamir has not yet
determined the effect that the adoption of SFAS No. 157 will have on its consolidated
financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits
entities to choose to measure many financial assets and financial liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. Shamir has not yet determined the effect that the adoption
of SFAS No. 159 will have on its consolidated financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---



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

|NOTE 3: |  | SHORT-TERM
INVESTMENTS
|------- | - | ----------------------

| | The
following is a summary of the Companys investment in marketable securities:
| | --------------------------------------------------------------------------------

| |                                     | December 31, 2006
| | ----------------------------------- | -----------------
|
|
|
|
| | Available-for-sale:                 |                  
| |                                     |                  
| | Corporate debentures                |                  
| |                                     |                  
| | U.S. government agencies securities |                  
| |                                     |                  
| | Other securities                    |                  
| |                                     |                  
| |                                     |                  
| | Total                               |                  
| |                                     |                  
| | Accrued interest                    |                  
| |                                     |                  
| |                                     |                  
| |                                     |                  
| |                                     |                  

| | As
of December 31, 2006, the gross unrealized losses amounted to $33 and the gross
unrealized gains amounted to $12. All the losses were accumulated in the past 12 month,
and are not deemed to be other than temporarily impaired. The unrealized losses in the
Companys investments in available-for-sale marketable securities were caused by
interest rate increases. The contractual cash flows of these investments are either
guaranteed by the U.S. government or an agency of the U.S. government or were issued by
highly rated corporations. Accordingly, it is expected that the securities would not be
settled at a price less than the amortized cost of the Companys investment. Based
on the immaterial severity of the impairments and the ability and intent of the Company
to hold these investments until a recovery of fair value, which may be maturity, the
bonds were not considered to be other than temporarily impaired at December 31, 2006.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amortized cost and fair value of marketable securities as of December 31, 2006, by
contractual maturity, are shown below:
| | -----------------------------------------------------------------------------------------------------------------------------

| |                                           | December 31, 2006
| | ----------------------------------------- | -----------------
|
|
|
|
| | Matures in one year                       |                  
| | Matures after one year through five years |                  
| |                                           |                  
| |                                           |                  
| | Total                                     |                  
| |                                           |                  

| | Auction
rate securities in the amount of $ 3,700 as of December 31, 2006, were classified as
available-for-sale marketable securities and were presented as short-term marketable
securities. The scheduled maturities of these securities at December 31, 2006 are above 5
years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2005, the Companys short-term investments consist of short-term
bank deposit with a 4.1% weighted average interest rate.
| | --------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---



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

|NOTE 4: |  | OTHER
RECEIVABLES AND PREPAID EXPENSES
|------- | - | --------------------------------------

| |                        | December 31,
| | ---------------------- | ------------
|
|
|
|
| | Prepaid expenses       |             
| | Government authorities |             
| | Deferred tax assets    |             
| | Related parties        |             
| | Other                  |             
| |                        |             
| |                        |             
| |                        |             
| |                        |             

|NOTE 5: |  | INVENTORY
|------- | - | ---------

| |                  | December 31,
| | ---------------- | ------------
|
|
|
|
| | Raw materials    |             
| | Work-in-progress |             
| | Finished goods   |             
| |                  |             
| |                  |             
| |                  |             
| |                  |             

|NOTE 6: |  | INVESTMENTS
IN AFFILIATES AND OTHERS
|------- | - | ------------------------------------

| | a. | Affiliated
companies are as follows:
| | -- | ------------------------------------

| |                                             |  | December 31,
| | ------------------------------------------- |  | ------------
|
|
|
|
| | Shamir Einit Ltd.                           |  |             
| | Centro Integral Optico S.A. de C.V. ("CIO") |  |             
| | Shalens S.A. de C.V.                        |  |             
| | Shamir Or Ltd.                              |  |             
| | e-Vision LLC                                |  |             

| | *) | On
July 2, 2006, Shamir acquired an additional 50% of the ownership interest           and
the voting power in Shamir Or Ltd., an R&D Israeli based affiliate, for           the
amount of $ 27, increasing its ownership interest to 100%.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **) | Less
than 20% ownership. In 2005 and 2006, Shamir does not exercise significant
          influence over operating and financial policy of the affiliate. The investment
          is stated according to cost basis.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---



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

|NOTE 6: |  | INVESTMENTS
IN AFFILIATES AND OTHERS (cont.)
|------- | - | --------------------------------------------

| | b. | Composition
of investments:
| | -- | ---------------------------

| |                      | December 31,
| | -------------------- | ------------
|
|
|
|
| | Shamir Einit Ltd.    |             
| | CIO                  |             
| | Shalens S.A. de C.V. |             
| | Shamir Or Ltd.       |             
| | e-Vision LLC         |             
| |                      |             
| |                      |             
| |                      |             
| |                      |             

| | c. | Additional
information  investment in CIO:
| | -- | -------------------------------------------

| |                          | December 31,
| | ------------------------ | ------------
|
|
|
|
| | Equity, net (1)          |             
| |                          |             
| | Long-term loans (2)      |             
| |                          |             
| |                          |             
| | Total investments in CIO |             
| |                          |             

| | (1)
Net equity as follows:
| | --------------------------

| |                                                          | December 31,
| | -------------------------------------------------------- | ------------
|
|
|
|
| | Net equity as of purchase date                           |             
| | Unamortized goodwill                                     |             
| | Customers relationships, net of accumulated amortization |             
| | Accumulated net losses                                   |             
| | Option value *)                                          |             
| |                                                          |             
| |                                                          |             
| | Total investments in CIO                                 |             
| |                                                          |             

| | *)
Shamir has an option to increase holdings in CIO by additional 25% to a total
          of 51%. The option is set to expire at February 1, 2008. The option price,
          should it be exercised in full, is an additional $2,860 in cash that would be
          paid directly to CIOs shareholders.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2)
The loans bear an interest rate of 4% per annum.
| | ----------------------------------------------------

F - 29

---

---



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

|NOTE 6: |  | INVESTMENTS
IN AFFILIATES AND OTHERS (cont.)
|------- | - | --------------------------------------------

| | d. | Additional
information  investment in Shamir Einit Ltd. and Shalens S.A.           de C.V.:
| | -- | --------------------------------------------------------------------------------------------

| |                                           | Shamir Einit Ltd. | Shalens S.A. de C.V.
| | ----------------------------------------- | ----------------- | --------------------
|
|
|
|
| | Equity, net                               |                   |                     
| |                                           |                   |                     
| | Long-term loans *)                        |                   |                     
| |                                           |                   |                     
| |                                           |                   |                     
| | Total investments as of December 31, 2006 |                   |                     
| |                                           |                   |                     

| | *)
The loans to Shamir Einit Ltd. bear the Libor interest rate (as of December 31,
          2006, was 5.3% per annum) and the loans to Shalens S.A. de C.V. bear an
interest           rate of 4% per annum.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 7: |  | PROPERTY,
PLANT AND EQUIPMENT, NET
|------- | - | ----------------------------------

| |                                            | December 31,
| | ------------------------------------------ | ------------
|
|
|
|
| | Cost:                                      |             
| | Machinery and manufacturing equipment      |             
| | Furniture and office equipment             |             
| | Motor vehicles                             |             
| | Land, buildings and leasehold improvements |             
| |                                            |             
| |                                            |             
| |                                            |             
| |                                            |             
| |                                            |             
| | Accumulated depreciation                   |             
| |                                            |             
| |                                            |             
| | Depreciated cost                           |             
| |                                            |             

| | Depreciation
expense totaled $ 3,632, $ 4,228 and $ 5,282 for the years ended December 31,
2004, 2005 and 2006, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2005 and 2006, property and equipment under capital leases consist of assets
with a depreciated cost of $ 3,018 and $ 7,362, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
of property and equipment under capital leases totaled $ 630, $ 816 and $ 1,535 for the
years ended December 31, 2004, 2005 and 2006, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
for pledges, see Note 14c.
| | -----------------------------

F - 30

---

---



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

|NOTE 8: |  | OTHER
ASSETS
|------- | - | ------------

| | a. | Other
assets:
| | -- | -------------

| |                                  | December 31,
| | -------------------------------- | ------------
|
|
|
|
| | Deferred tax assets              |             
| | Other intangible assets, net (b) |             
| |                                  |             
| |                                  |             
| | Total other assets               |             
| |                                  |             

| | b. | (1) | Other intangible assets, net:
| | -- | --- | -----------------------------

| |                               | December 31,
| | ----------------------------- | ------------
|
|
|
|
| | Original amounts:             |             
| | Technology                    |             
| | Customer relationship         |             
| | Non-competition               |             
| | Distribution channels         |             
| | Trade name                    |             
| |                               |             
| |                               |             
| |                               |             
| |                               |             
| | Accumulated amortization:     |             
| | Technology                    |             
| | Customer relationship         |             
| | Non-competition               |             
| | Distribution channels         |             
| | Trade name                    |             
| |                               |             
| |                               |             
| |                               |             
| |                               |             
| |                               |             
| | Total other intangible assets |             
| |                               |             

| | (2) | Amortization
expense amounted to $ 173, $ 501 and $ 968 for the years           ended
December 31, 2004, 2005 and 2006, respectively.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Estimated
amortization expense for the years ended:
| | --- | ---------------------------------------------------

| |                     | 
| | ------------------- | 
|
|
|
|
| | 2007                | 
| | 2008                | 
| | 2009                | 
| | 2010                | 
| | 2011 and thereafter | 
| |                     | 
| |                     | 
| |                     | 
| |                     | 

F - 31

---

---



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

|NOTE 9: |  | GOODWILL
|------- | - | --------

| | The
changes in the carrying amount of goodwill for the years ended December 31, 2005 and
2006, are as follows:
| | --------------------------------------------------------------------------------------------------------------

| |                                                         | 
| | ------------------------------------------------------- | 
|
|
|
|
| | Balance as of January 1, 2005                           | 
| | Goodwill acquired during the year                       | 
| | Foreign currency translation adjustments                | 
| |                                                         | 
| |                                                         | 
| | Balance as of December 31, 2005                         | 
| | Goodwill acquired during the year                       | 
| | Additional consideration in respect of 2006 earnings *) | 
| | Reduction of goodwill due to loan write off **)         | 
| | Foreign currency translation adjustments                | 
| |                                                         | 
| |                                                         | 
| | Balance as of December 31, 2006                         | 
| |                                                         | 

| | *) | See
Note 1e.
| | -- | ------------

| | **) | See
Note 1c.
| | --- | ------------

|NOTE 10: |  | SHORT-TERM
BANK CREDIT AND LOANS
|-------- | - | --------------------------------

| | Short-term
bank credit and loans are classified by currencies as follows:
| | -------------------------------------------------------------------------

| |                                        | Weighted average
interest rate |  | 
| | -------------------------------------- | ------------------------------ |  | 
|
|
|
|
| | Short-term bank loans: - Euro          |                                |  | 
| |                                        |                                |  | 
| |                                        |                                | 
| | Short-term bank credit *)              |                                |  | 
| |                                        |                                |  | 
| |                                        |                                | 
| | Total short-term bank credit and loans |                                |  | 
| |                                        |                                |  | 

| | *) | Mostly
denominated in euro.
| | -- | ---------------------------

| | As
of December 31, 2006, Shamir had authorized unused credit lines from banks in the amount
of approximately $ 8,484.
| | ---------------------------------------------------------------------------------------------------------------------

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 11: |  | ACCRUED
EXPENSES AND OTHER LIABILITIES
|-------- | - | --------------------------------------

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
|
| | Employees and payroll accruals |             
| | Accrued expenses               |             
| | Advances from customers        |             
| | Government authorities         |             
| | Related party                  |             
| | SII former  shareholders       |             
| | Others                         |             
| |                                |             
| |                                |             
| |                                |             
| |                                |             

|NOTE 12: |  | LONG-TERM
LOANS
|-------- | - | ---------------

| | a. | Long-term
loans are classified by currencies as follows:
| | -- | --------------------------------------------------------

| |                                        | Weighted average
interest rate |  | 
| | -------------------------------------- | ------------------------------ |  | 
|
|
|
|
|
| | Banks:                                 |                                |  | 
| | Dollar                                 |                                |  | 
| | Euro                                   |                                |  | 
| | NIS                                    |                                |  | 
| |                                        |                                |  | 
| |                                        |                                | 
| |                                        |                                |  | 
| |                                        |                                |  | 
| | Minority shareholders in subsidiaries: |                                | 
| | Euro *)                                |                                |  | 
| |                                        |                                |  | 
| |                                        |                                | 
| | Others:                                |                                | 
| | Dollar                                 |                                |  | 
| | Euro                                   |                                |  | 
| | GBP                                    |                                |  | 
| |                                        |                                |  | 
| |                                        |                                | 
| |                                        |                                |  | 
| |                                        |                                |  | 
| |                                        |                                | 
| | Total long-term loans                  |                                |  | 
| |                                        |                                |  | 
| |                                        |                                | 
| | Less - current maturities              |                                |  | 
| |                                        |                                |  | 
| |                                        |                                | 
| |                                        |                                |  | 
| |                                        |                                |  | 

| | *) | No
repayment date was set to the loans from minority shareholders in           subsidiaries.
These loans are not due in the twelve months following December           31, 2006.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 12: |  | LONG-TERM
LOANS (Cont.)
|-------- | - | -----------------------

| | b. | Long-term
loans mature as follows (excluding loans from minority shareholders):
| | -- | -------------------------------------------------------------------------------

| |                           | 
| | ------------------------- | 
|
|
|
|
| | 2007 (current maturities) | 
| | 2008                      | 
| | 2009                      | 
| | 2010 and thereafter       | 
| |                           | 
| |                           | 
| |                           | 
| |                           | 

| | c. | Financial
covenants
| | -- | -------------------

| | As
security for various bank liabilities Shamirs subsidiary undertook to comply with
certain minimal financial ratios. As of the financial statements date, Shamirs
subsidiary is in compliance with the financial covenants.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 13: |  | CAPITAL
LEASES
|-------- | - | --------------

| | Capital
leases mature as follows:
| | ---------------------------------

| |                           | 
| | ------------------------- | 
|
|
|
|
| | 2007 (current maturities) | 
| | 2008                      | 
| | 2009                      | 
| | 2010 and thereafter       | 
| |                           | 
| |                           | 
| | Total                     | 

| | For
the leased assets that are included as part of Properties, plant and equipment, net. (see
Note 7).
| | --------------------------------------------------------------------------------------------------------

|NOTE 14: |  | COMMITMENTS
AND CONTINGENT LIABILITIES
|-------- | - | --------------------------------------

| | a. | Legal
proceedings:
| | -- | ------------------

| | In
November 2003, one of Shamir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 belonging to it. Shamir has
denied any such infringement allegations and has entered into negotiations with the
manufacturer with regard to this patent in order to reach a resolution. A Licensing
Agreement is currently being negotiated between the parties. Shamir cannot predict the
outcome of the claim nor can it make any estimate of the amount of damages, if held
responsible.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2003, Shamir received a notice by a large lens manufacturer of a claim of
patent infringement relating to lens produced using Shamir software. Shamir has denied
any such infringement, and numerous discussions between the companies (and
counsel) ensued in order to resolve the matter without resorting to litigation.
Currently, there is an agreement in principle on the monetary terms of a settlement;
however, several key terms and conditions of the agreement are still under discussion.
Shamir cannot predict the outcome of the claim nor can it make any estimate of the amount
of damages, if held responsible.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 14: |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | On
June 8, 2006, one of Shamirs customers filed a complaint in order to avoid and
recover preferential transfers due to Shamir USA. The payment amount in question that was
received during the Preferential Period (March 25, 2004 through June 22,
2004) was estimated at $ 347. In January 2007, Shamir settled the dispute at the total
sum of $100 and all charges have been redrawn. An accrual for the total dispute
settlement is included in the balance sheet as of December 31, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Operating
lease commitments:
| | -- | ----------------------------

| | The
land and certain of Shamir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, 2006, are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |            | 
| | ---------- | 
|
|
|
|
| | 2007       | 
| | 2008       | 
| | 2009       | 
| | 2010       | 
| | 2011       | 
| | Thereafter | 
| |            | 
| |            | 
| |            | 
| |            | 

| | Lease
expenses for the years ended December 31, 2004, 2005 and 2006, were approximately $ 572,
$ 1,082 and $ 1,162, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | c. | Pledges:
| | -- | --------

| | 1. | In
order to secure government grants received by the Company and Eyal under the
          Approved Enterprise programs pursuant to the Law for the
          Encouragement of Capital Investments, 1959, the Company 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 15d).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | To
secure the fulfillment of the Companys liabilities, the Company           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. These pledges were removed at the beginning of 2007. 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 subsidiary of the Company pledged its land and
building in           an aggregate amount of approximately $ 1,545 to secure bank
commitments.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---



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

|NOTE 15: |  | TAXES
ON INCOME
|-------- | - | ---------------

| | a. | Up
until December 31, 2004, the Company was not assessed for tax purposes and
               its business results were passed through to its shareholders. As a result,
tax                expenses of the Company were not included in the statements of income.
               Commencing January 1, 2005, the Company 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.
The Company 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:
| | -- | ---------------------------------------------------------------------------------------------

| | The
Company 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Tax
benefits under the Israel Law for the Encouragement of Capital Investments,
          1959 (the Law):
| | -- | -----------------------------------------------------------------------------------------------------------

| | The
Law empowers the Israeli Investment Center to grant Approved Enterprise status to capital
investments in production facilities that meet certain relevant criteria (Approved
Enterprise). In general, such capital investments will receive Approved Enterprise
status if the enterprise is expected to contribute to the development of the productive
capacity of the economy, absorption of immigrants, creation of employment opportunities,
or improvement in the balance of payments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax benefits derived from any such Approved Enterprise relate only to taxable income
attributable to the specific program of investment to which the status was granted. To
the extent that Shamir or any of its subsidiaries has been granted Approved Enterprise
status and operates under more than one approval, or that its capital investments are
only partly approved, its effective corporate tax rate will be the result of a weighted
combination of the various rates applicable.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Four
of Shamirs programs 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 based on the level of foreign ownership for a
period of five to eight years. Income derived from the first, second, and third program
was tax-exempt for a period of two years, commencing 1995, 1999, and 2001, respectively,
and is taxed at the reduced corporate tax rate of 10%-25% for an additional period of
five to eight years (based on the percentage of foreign ownership in each taxable year).
With respect to the fourth approved enterprise program the Company is currently
considering when to start its benefits year (i.e. the year 2005 or 2006), and
accordingly it will continue until the year 2014 or the year 2015.The tax benefits period
of the first program ended on the year 2001, and as of December 31, 2006, the company has
three existing programs. Shamirs income from sources other than the Approved
Enterprise during the period of benefits will be taxable at the regular corporate
tax rate.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---



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

|NOTE 15: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | A
portion of the facilities of the Companys subsidiary Eyal has also been granted the
status of an Approved Enterprise under three programs. For these programs,
Eyal has elected alternative benefits, waiving grants in return for tax exemptions.
Income derived from the first, second and third program was tax-exempt for a period of
two years, commencing 2002, 2004 and 2006, respectively, and is taxed at the reduced
corporate tax rate of 10%-25% (based on the percentage of foreign ownership in each
taxable year) for an additional period of five to eight years. Eyals income from
sources other than the Approved Enterprise during the period of benefits is
taxable at the regular corporate tax rate.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
benefits are contingent upon compliance with the terms of the approvals and of the Law.
As of December 31, 2006, Management believes that both Shamir and Eyal are meeting all
conditions of the approvals.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | On
April 1, 2005, an amendment to the Investment Law came into effect (the Amendment),
and has significantly changed the provisions of the Investment Law. The Amendment limits
the scope of enterprises which may be approved by the Investment Center by setting
criteria for the approval of a facility as a Privileged Enterprise, such as provisions
generally requiring that at least 25% of the Privileged Enterprises income will be
derived from export. Additionally, the Amendment enacted major changes in the manner in
which tax benefits are awarded under the Investment Law so that companies no longer
require Investment Center approval in order to qualify for tax benefits. However, the
Investment Law provides that terms and benefits included in any certificate of approval
already granted will remain subject to the provisions of the law as they were on the date
of such approval.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
polycarbonate and the production of finished lenses facilities of the Companys
subsidiary Shamir Special Optical Products Ltd. (SSOP), received a pre-ruling
from the Israeli Tax Authority, where the Company was declared as a Privileged
Enterprise (establishment), so all of its income from the above mentioned
facilities will be exempted from tax for the period of ten years beginning with the year
in which the Company first had taxable income. SSOP has not begun to enjoy the tax
benefits in the year 2006 due to its accumulated losses.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event of distribution of dividends from tax-exempt income, a reduced tax rate
(currently  25%) in respect of the amount distributed would have to be paid. As of
December 31, 2006, retained earnings included approximately $7,660 in tax-exempt profits
earned by the Companys Approved Enterprises. Effectively such dividend
distribution would be reduced by the amount of the tax.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the Amendment, tax-exempt income generated under the provisions of the
amended law, will subject the Company to taxes upon dividend distribution or complete
liquidation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has decided not to declare dividends out of such tax-exempt income. Accordingly,
no deferred income taxes have been provided on income attributable to the Companys
Approved Enterprise.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---



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

|NOTE 15: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | e. | Net
operating losses carry forward:
| | -- | -----------------------------------

| | As
of December 31, 2006, Shamir had carry forward tax losses in certain tax jurisdictions,
most of which are derived from subsidiaries in the U.K., Turkey and France, totaling
approximately $ 14.8 million, which can be carried forward for a range between five
years to indefinitely.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 Shamirs deferred tax assets and liabilities are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                      | December 31,
| | ---------------------------------------------------- | ------------
|
|
|
|
| | Deferred tax assets:                                 |             
| | Issuance costs and others                            |             
| | Operating losses carry forward                       |             
| |                                                      |             
| |                                                      |             
| | Total deferred tax assets before valuation allowance |             
| | Valuation allowance **)                              |             
| |                                                      |             
| |                                                      |             
| | Total deferred tax assets *)                         |             
| |                                                      |             
| |                                                      |             
| | Deferred tax liabilities:                            |             
| | Property and equipment                               |             
| | Other intangible assets                              |             
| |                                                      |             
| |                                                      |             
| | Total deferred tax liabilities                       |             
| |                                                      |             
| |                                                      |             
| | Net deferred tax assets                              |             
| |                                                      |             

| | *) | Deferred
tax assets of $ 1,264 and $ 2,418 have been included in other           receivables and
prepaid expenses and $ 1,202 and $ 2,430 have been included in           other assets, as
of December 31, 2005 and 2006, respectively (see Note 4           and Note 8a).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **) | Including
valuation allowance in the amount of $ 367 that is attributed to           operating
losses in Shamir Or before the acquisition date. Any subsequent           reduction of
this valuation allowance and the recognition of the associated tax           benefit will
be applied to reduce goodwill.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 15: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | The
Company has provided valuation allowances in respect of certain deferred tax assets
resulting from tax loss carry forwards and other reserves and allowances due to
uncertainty concerning realization of these deferred tax assets.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | A
reconciliation of Shamirs effective tax rate to the statutory tax rate           in
Israel is as follows:
| | -- | ------------------------------------------------------------------------------------------------------------

| |    |                                                                                                                        | Year ended December 31,
| | -- | ---------------------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|
| |    | Income before taxes on income                                                                                          |                        
| |    |                                                                                                                        |                        
| |    |                                                                                                                        |                        
| |    | Statutory tax rate in Israel                                                                                           |                        
| |    |                                                                                                                        |                        
| |    |                                                                                                                        |                        
| |    | Increase (decrease) in tax expenses resulting from:                                                                    |                        
| |    | Income passed through to the Company's shareholders                                                                    |                        
| |    | "Approved Enterprise" benefits                                                                                         |                        
| |    | Tax expenses related to change of tax status                                                                           |                        
| |    | Net operating losses and temporary differences which are tax exempt
      or for which valuation allowance was created |                        
| |    | Taxes in respect of prior years                                                                                        |                        
| |    | Others                                                                                                                 |                        
| |    |                                                                                                                        |                        
| |    |                                                                                                                        |                        
| |    | Effective tax rate                                                                                                     |                        
| |    |                                                                                                                        |                        
| |    |                                                                                                                        |                        
| |    | Pro-forma additional taxes on income in respect of income passed to the
   shareholders (unaudited)                    |                        
| |    |                                                                                                                        |                        
| |    |                                                                                                                        |                        
| |    | Pro-forma effective tax rate (unaudited)                                                                               |                        
| |    |                                                                                                                        |                        
| |    |                                                                                                                        |                        
| |    | Basic and diluted net earnings per share amounts of the benefit
   resulting from the "Approved Enterprise" status     |                        
| |    |                                                                                                                        |                        
| |    |                                                                                                                        |                        
| | i. | Income (loss) before taxes on income is comprised as follows:                                                          |                        
| |    |                                                                                                                        |                        
| |    | Domestic                                                                                                               |                        
| |    | Foreign                                                                                                                |                        
| |    |                                                                                                                        |                        
| |    |                                                                                                                        |                        
| |    |                                                                                                                        |                        
| |    |                                                                                                                        |                        

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 15: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | j. | Taxes
on income are comprised as follows:
| | -- | -----------------------------------------

| |                                                       | Year ended December 31,
| | ----------------------------------------------------- | -----------------------
|
|
|
|
| | Current taxes                                         |                        
| | Taxes in respect of prior years                       |                        
| | Deferred tax expenses related to change of tax status |                        
| | Deferred tax benefit                                  |                        
| |                                                       |                        
| |                                                       |                        
| |                                                       |                        
| |                                                       |                        
| |                                                       |                        
| | Domestic                                              |                        
| | Foreign                                               |                        
| |                                                       |                        
| |                                                       |                        
| |                                                       |                        
| |                                                       |                        

|NOTE 16: |  | 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 the Companys
equity approved on March 6, 2005, according to which each share of the Company was
converted into 120.48 ordinary shares of the reorganized corporation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Share
rights:
| | -- | -------------

| | Ordinary
shares of the Company confer upon their holders the right to receive notice to
participate and vote in the general meetings of the Company and the right to receive
dividends when declared.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Issuance
of shares:
| | -- | -------------------

| | On
June 28, 2004, the Company issued 160,961 shares to a third party investor for a net
amount of $ 1,945.
| | ----------------------------------------------------------------------------------------------------------

| | On
March 16, 2005, the Company 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 16, 2005, upon the IPO, the Put option that was granted as part of Eyal acquisition
expired, and the Company reclassified 502,400 putable shares from temporary equity into
shareholders equity. In addition, the Company 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 - 40

---

---



|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: |  | 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 Shamir may be
granted options to acquire shares. The number of options to acquire ordinary shares and
the related exercise price are determined by the Board of Directors of Shamir and its
Compensation Committee. Grants of options to directors required the approval of Shamirs
shareholders according to the Israeli Companies Law. The 2005 General Share and Incentive
Plan was approved and adopted by Shamirs board on February 1, 2006. 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. According to the 2005 General Share and Incentive Plan
during the year 2006 we could grant 350,000 options to purchase Shamirs shares and
in each following year the option pool shall increase by an additional 280,000 options.
Unless otherwise stated in the relevant award agreement, awards, to the extent not
previously exercised, shall terminate forthwith upon the earlier of: (i) the date set
forth in the award agreement; and (ii) the expiration of the relevant period in the case
of voluntarily liquidation or dissolution of Shamir, or in the events set forth in the
2005 General Share and Incentive Plan; and (iii) the lapse of 7 years from the date of
grant. The options granted pursuant to the 2003 Option Plan are exercisable for a period
of ten (10) years following the grant date and were fully vested at the grant date. The
options that were granted prior to the adoption of the 2005 General Share and Incentive
Plan during the years 2004 and 2005 will vest in four tranches of 25% per year.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options outstanding as of December 31, 2006, have been separated into exercise price
categories as follows:
| | ---------------------------------------------------------------------------------------------------------------

| | Ranges of
exercise price | Options
outstanding
as of
December 31,
2006 | Weighted
average
remaining
contractual
life | Weighted
average
exercise
price | Options
exercisable
as of
December 31,
2006 | Weighted
Average
Exercise
price of
Exercisable
Options
| | ------------------------ | ------------------------------------------- | ------------------------------------------- | ------------------------------- | ------------------------------------------- | ------------------------------------------------------
|
|
|
|
| | 0.00                     |                                             | 167,226                                     |                                 |                                             | 6.75                                                  
| | 2.46                     |                                             | 167,105                                     |                                 |                                             | 6.75                                                  
| | 8.86-9.97                |                                             | 387,480                                     |                                 |                                             | 5.02                                                  
| | 10.30-12.43              |                                             | 960,082                                     |                                 |                                             | 4.72                                                  
| | 14.00                    |                                             | 164,780                                     |                                 |                                             | 5.59                                                  
| |                          |                                             |                                             |                                 |                                             |                                                       
| |                         
| |                          |                                             | 1,846,673                                   |                                 |                                             | 5.23                                                  
| |                          |                                             |                                             |                                 |                                             |                                                       

F - 41

---

---



|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: |  | SHAREHOLDERS EQUITY
(Cont.)
|-------- | - | ----------------------------

| | e. | Modification
of options to employees:
| | -- | -------------------------------------

| | On
July 1, 2006, Shamirs former Chief Finance Officer has resigned from his position
in Shamir. As of the resignation date, 33,486 of his options, which were unvested and
were not expected to be vested as of the resignation date, were cancelled. The vesting
period of the remaining 66,974 options was accelerated such that they were all fully
vested as of July 1, 2006. The contractual term of the remaining options was extended
until July 31, 2008. As a result, Shamir recorded additional compensation cost in the
amount of $ 80 in 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | SII
share option plan:
| | -- | ----------------------

| | On
June 8, 2005, the Companys subsidiary SII, granted 90 options to acquire SIIs
shares to certain of its officers. 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Options
to non-employees:
| | -- | -------------------------

| | In
May 2006, Shamir granted, 70,000 options to consultants, exercisable for a period of 7
years pursuant to the terms of the 2005 General Share and Incentive Plan.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 17: |  | TRANSACTIONS
WITH RELATED PARTIES
|-------- | - | ---------------------------------

| | a. | Working
services agreement with Kibbutz Shamir (the Kibbutz):
| | -- | ---------------------------------------------------------------

| | In
1999, the Company signed a working services agreement with the Kibbutz, its principal
shareholder, pursuant to which the Kibbutz supplies labor services at the Company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 the Company 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 the Company. On February 9, 2005, the Company entered into a 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. Working services fees amounted to
$ 1,584, $ 1,347 and $ 1,317 for the years ended December 31, 2004, 2005 and
2006, respectively
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 28, 2007, the Companys audit committee and board of directors resolved to enter
into, subject to the approval of the Companys shareholders, a new working services
agreement with Kibbutz Shamir. The terms of the new working services agreement are
substantially similar to the terms of the current agreement, extending the reimbursement
rights of the Company for any liabilities that may arise under an imputed
employer-employee relationship between the Company and the members of Kibbutz Shamir who
provide the services and providing that the Company is entitled to determine at its
discretion with respect to new workers provided by Kibbutz Shamir and current workers
whose scope of position has changed since the date of the new working services agreement,
the consideration to be paid by the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---



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

|NOTE 17: |  | TRANSACTIONS
WITH RELATED PARTIES (Cont.)
|-------- | - | -----------------------------------------

| | b. | Services
from the Kibbutz:
| | -- | --------------------------

| | The
Company signed a service agreement with the Kibbutz, pursuant to which the Kibbutz
provides the Company 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 a 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 fees to the Kibbutz for service under
the agreement and for other services amounting to $ 307, $ 335 and $ 338
for the years ended December 31, 2004, 2005 and 2006, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 8, 2007, the Companys shareholders at a special shareholders meeting approved
a new service agreement between Kibbutz Shamir and the Companys subsidiary, Shamir
Special Optical Products Ltd. (SSOP), for the period commencing upon the
acceptance of the new factory that is being built in Kibbutz Shamir for SSOP and ending
on February 9, 2010, pursuant to which Kibbutz Shamir will provide administrative and
maintenance services to SSOP to maintain the factory. SSOP shall pay Kibbutz Shamir a
monthly fee of NIS 25,000 linked to the Consumer Price Index. In the event that the
actual cost of services in any year is higher or lower by 30% or more compared to the
service fee paid in the preceding calendar year, not taking into account extraordinary
expenses not in the ordinary course of business, the service fee for the following year
will be adjusted accordingly. The term of the service agreement will be extended
automatically for additional periods of five years each unless either of the parties
terminates the service agreement by giving a 12-months advance notice prior to the
scheduled expiration date. The service fee will be adjusted at the end of the initial
term of the service agreement and then every five years, assuming that the service
agreement is extended, based on the actual cost of services in the year preceding the
adjustment date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 28, 2007, the Companys audit committee and board of directors resolved, subject
to the approval of the Companys shareholders, to enter into a new arrangement with
Kibbutz Shamir. Under the new service arrangement between the Company and Kibbutz Shamir,
Shamir will be entitled to purchase additional services not covered by the current
service agreement. The consideration for a single transaction will be no greater than $7
(plus VAT, if required by law) and the aggregate consideration for services purchased by
Shamir during any calendar year will be no greater than $300 (plus VAT, if required by
law). At least one additional proposal in writing from an unaffiliated third party shall
be obtained prior to each service order.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Lease
agreement:
| | -- | ----------------

| | The
Companys offices, manufacturing, and research and development facilities are
located on the grounds of the Kibbutz. The facilities are sub-leased from the Kibbutz,
which has a long-term lease on the property from the Israel Lands Administration (the
ILA). On January 5, 1999, the Company and the Kibbutz signed a sub-lease
agreement pursuant to which the Kibbutz sub-leased the facilities to the Company for a
period of twenty years beginning on January 1, 1999. Rental payments amounted to $
294, $ 292 and $ 297 for the years ended December 31, 2004, 2005 and 2006,
respectively. On February 9, 2005, the Company entered into an amendment to the sub-lease
agreement. The term of the amended agreement
was 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 a long term lease on the property from the ILA. The ILA may cancel
the lease in certain circumstances, including if the Kibbutz commences proceedings to
disband or liquidate or in the event that the Kibbutz ceases to be a kibbutz.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 43

---

---



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

|NOTE 17: |  | TRANSACTIONS
WITH RELATED PARTIES (Cont.)
|-------- | - | -----------------------------------------

| | On
June 4, 2006, the Company signed a memorandum of understanding with Shalag Industries
Ltd., a subsidiary of the Kibbutz, pursuant to which the Company rented 120 square meters
for SSOP. This memorandum of understanding provides for the same rental amounts as the
sublease agreement with Kibbutz Shamir, as described above. Rental payments amounted to $
4 for the year ended December 31 2006.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 8, 2007, the Companys shareholders at their special shareholders meeting
resolved that in lieu of such lease, Shamir and the Kibbutz shall enter into a lease
agreement pursuant to which Shamir will lease the new factory that is currently under
construction for SSOP until November 30, 2023 commencing on the earlier of the: (i) date
of occupancy, or (ii) date of the completion of the construction. Shamir will be entitled
to terminate the lease at any time; provided, however, that Shamir has located an
alternate tenant and the Kibbutz has given its consent, which consent would not be
unreasonably withheld. The parcel of land underlying the factory will be included in the
long-term lease between the Kibbutz and ILA, pursuant to which the Kibbutz may, with the
consent of the ILA, sublease the parcel to a corporation under its control. The consent
of the ILA for the lease, though, has not been obtained. In addition, the ILA may, from
time to time, change its regulations governing such lease agreement, which these changes
could affect the terms of the lease, and may trigger the termination of the lease. Under
the lease, the Kibbutz will be responsible for any expense resulting from actions of the
ILA. The annual rental fees pursuant to the lease shall be payable quarterly and shall be
in the amount equal to 10% of the actual construction cost of the factory, excluding VAT
and grants of the Investment Center, as certified by the board of directors of SSOP, but
in no event more than $500 per annum. The annual rent per square meter under the lease is
approximately equal to the annual rent per square meter under the terms and conditions of
the former lease agreement for such factory as originally approved.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Loan
to Kibbutz Shamir:
| | -- | -----------------------

| | In
accordance with the sublease agreement with the Kibbutz, the Company granted a loan of
approximately $ 370 to the Kibbutz in several installments in 2004 in order to fund the
construction of an extension to the Companys premises in the Kibbutz. 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 the Company pays the Kibbutz. The loan
bears interest at 1.5% per year.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
the Companys shareholders extraordinary general meeting of August 8, 2005, the
Companys shareholders approved a loan to Kibbutz Shamir in an amount not greater
than $ 4,400, which bears annual interest at a variable rate equal to annual LIBOR plus
1.5%. The loan provided Kibbutz Shamir with funds for the construction of a building on
the Kibbutzs territory for the use of Shamir. At the Companys shareholders
special general meeting of March 8, 2007, the Companys shareholders approved the
termination of the loan. As of March 31, 2007, the loan was fully repaid.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 44

---

---



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

|NOTE 17: |  | TRANSACTIONS
WITH RELATED PARTIES (Cont.)
|-------- | - | -----------------------------------------

| | e. | Transactions
with related parties:
| | -- | ----------------------------------

| |                                            | Year ended December 31,
| | ------------------------------------------ | -----------------------
|
|
|
|
| | Revenues                                   |                        
| |                                            |                        
| | Cost of revenues                           |                        
| |                                            |                        
| | Research and development                   |                        
| |                                            |                        
| | Selling and marketing                      |                        
| |                                            |                        
| | General and administrative                 |                        
| |                                            |                        
| | Financial expenses (income) and other, net |                        
| |                                            |                        

| | f. | Balances
with related parties:
| | -- | ------------------------------

| |                                                  | December 31 | December 31
| | ------------------------------------------------ | ----------- | -----------
|
|
|
|
| | Trade receivables                                |             |            
| |                                                  |             |            
| |                                                  |             |            
| | Other receivables and prepaid expenses (Note 4)  |             |            
| |                                                  |             |            
| |                                                  |             |            
| | Loan to related party                            |             |            
| |                                                  |             |            
| |                                                  |             |            
| | Accrued expenses and other liabilities (Note 11) |             |            
| |                                                  |             |            

|NOTE18: |  | GEOGRAPHIC
INFORMATION
|------- | - | ----------------------

| | a. | Shamir
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 table presents total revenues for the years ended December 31, 2004, 2005 and
2006, and long-lived assets as of December 31, 2004, 2005 and 2006, as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |               | 2004 | 2005 | 2006
| | ------------- | ---- | ---- | ----
|
|
|
|
| | Israel        |      |      | $   
| | United States |      |      |     
| | Europe        |      |      |     
| | Asia          |      |      |     
| | Others        |      |      |     
| |               |      |      |     
| |               |      |     
| |               |      |      | $   
| |               |      |      |     

F - 45

---

---



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

|NOTE 18: |  | GEOGRAPHIC
INFORMATION (Cont.)
|-------- | - | ------------------------------

| | b. | Product
lines:
| | -- | --------------

| | Total
revenues from external customers divided on the basis of Shamirs product lines are
as follows:
| | -----------------------------------------------------------------------------------------------------

| |                 | Year ended December 31,
| | --------------- | -----------------------
|
|
|
|
| | Lenses          |                        
| | Design services |                        
| |                 |                        
| |                 |                        
| |                 |                        
| |                 |                        

|NOTE 19: |  | SUPPLEMENTARY
DATA ON SELECTED STATEMENTS OF INCOME
|-------- | - | ---------------------------------------------------

| |    |                                                               | Year ended December 31,
| | -- | ------------------------------------------------------------- | -----------------------
|
|
|
|
| | a. | Financial income (expenses) and other, net                    |                        
| |    |                                                               |                        
| |    | Financial expenses:                                           |                        
| |    |                                                               |                        
| |    | Interest in respect of long-term loans                        |                        
| |    | Interest in respect of short-term loans                       |                        
| |    | Changes in derivatives fair value                             |                        
| |    | Other                                                         |                        
| |    |                                                               |                        
| |    |                                                               |                        
| |    |                                                               |                        
| |    |                                                               |                        
| |    | Financial income:                                             |                        
| |    |                                                               |                        
| |    | Income in respect of loans to related parties                 |                        
| |    | Income in respect of cash and cash equivalents and short-term |                        
| |    | investments                                                   |                        
| |    | Changes in derivatives fair value                             |                        
| |    | Foreign currency translation, net                             |                        
| |    | Other                                                         |                        
| |    |                                                               |                        
| |    |                                                               |                        
| |    |                                                               |                        
| |    |                                                               |                        
| |    |                                                               |                        
| |    | Other income                                                  |                        
| |    |                                                               |                        
| |    |                                                               |                        
| |    | Financial income (expenses) and other, net                    |                        
| |    |                                                               |                        

F - 46

---

---



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

|NOTE 19: |  | 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:
| | -------------------------------------------------------------------------------------------

| | 1. | Numerator:
| | -- | ----------

| |    |                                                                                      | Year ended December 31,
| | -- | ------------------------------------------------------------------------------------ | -----------------------
|
|
|
|
| |    | Numerator for basic and diluted net earnings per share -                             |                        
| |    | Net income available to shareholders                                                 |                        
| |    |                                                                                      |                        
| |    |                                                                                      |                        
| | 2. | Denominator (in thousands):                                                          |                        
| |    |                                                                                      |                        
| |    | Denominator for basic net earnings per share -                                       |                        
| |    | Weighted average shares - Shareholders' equity                                       |                        
| |    | Weighted average shares - Temporary equity                                           |                        
| |    |                                                                                      |                        
| |    |                                                                                      |                        
| |    | Weighted average number of shares                                                    |                        
| |    |                                                                                      |                        
| |    |                                                                                      |                        
| |    | Effect of dilutive securities:                                                       |                        
| |    |                                                                                      |                        
| |    | Add - Call option                                                                    |                        
| |    | Add - Employee stock options                                                         |                        
| |    |                                                                                      |                        
| |    |                                                                                      |                        
| |    |                                                                                      |                        
| |    |                                                                                      |                        
| |    | Denominator for diluted net earnings per share - adjusted
   weighted average shares |                        
| |    |                                                                                      |                        

F - 47

---

---



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

|NOTE 19: |  | SUPPLEMENTARY
DATA ON SELECTED STATEMENTS OF INCOME (Cont.)
|-------- | - | -----------------------------------------------------------

| | c. | Inventory
provision:
| | -- | --------------------

| | The
change in the inventory provision for slow-moving inventory for the years ended December
31, 2004, 2005 and 2006, are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------

| |                                         | Year ended December 31,
| | --------------------------------------- | -----------------------
|
|
|
|
| | Balance at the beginning of the year    |                        
| | Inventory provision                     |                        
| | Inventory written-off                   |                        
| | Foreign currency translation adjustment |                        
| |                                         |                        
| |                                         |                        
| | Balance at the end of the year          |                        
| |                                         |                        

| | d. | Provision
for doubtful accounts:
| | -- | --------------------------------

| | The
change in the provision for doubtful accounts for the years ended December 31, 2004, 2005
and 2006, are as follows:
| | -----------------------------------------------------------------------------------------------------------------------

| |                                         | Year ended December 31,
| | --------------------------------------- | -----------------------
|
|
|
|
| | Balance at the beginning of the year    |                        
| | Doubtful accounts provision             |                        
| | Bad-debts written-off                   |                        
| | Foreign currency translation adjustment |                        
| |                                         |                        
| |                                         |                        
| | Balance at the end of the year          |                        
| |                                         |                        

|NOTE 20: |  | SUBSEQUENT
EVENTS (UNAUDITED)
|-------- | - | -----------------------------

| | a. | Investment
in Siam Optical Technology Company Ltd.:
| | -- | ---------------------------------------------------

| | During
January 2007, Shamir completed the acquisition of 25.8% of the ownership interests in
Siam Optical Technology Company Ltd., an optical laboratory in Thailand, which also holds
70% of its local subsidiary, K.T. Optic Company Limited. The purchase price amounted to
approximately $ 250. Shamir committed to provide a loan to Siam Optical Technology
Company Ltd. in the amount of $ 540.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 48

---

---



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

|NOTE 20: |  | SUBSEQUENT
EVENTS (UNAUDITED) (Cont.)
|-------- | - | -------------------------------------

| | b. | Impact
of recently issued accounting standard:
| | -- | ----------------------------------------------

| | In
June 2006, the Financial Accounting Standard Board issued FIN 48. FIN 48 creates a single
model to address uncertainty in tax positions. FIN 48 clarifies the accounting for income
taxes by prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes
from Financial Accounting Standards Board Statement No. 5, Accounting for
Contingencies. FIN 48 utilizes a two-step approach for evaluating tax positions.
Recognition (step one) occurs when an enterprise concludes that a tax position, based
solely on its technical merits, is more-likely-than-not to be sustained upon examination.
Measurement (step two) is only addressed if step one has been satisfied (i.e., the
position is more-likely-than-not to be sustained). FIN 48 applies to all tax positions
related to income taxes subject to SFAS No. 109, Accounting for Income Taxes.This
includes tax positions considered to be routine as well as those with a high
degree of uncertainty. Derecognition of a tax position that was previously recognized
would occur when a company subsequently determines that a tax position no longer meets
the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the
use of a valuation allowance as a substitute for derecognition of tax positions. FIN 48
is effective for fiscal years beginning after December 15, 2006. As a result of the
implementation of FIN 48, Shamir decreased its retained earnings as of January 1, 2007,
by approximately $340 thousands.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 49

---

---



# 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 LTD.By: /s/ Giora Ben-Ze'ev
Giora Ben-Ze'evChief Executive Officer
| |  | --------------------------------------------------------------------------------------------------------

| |  | By: /s/ Yagen Moshe
Yagen MosheChief Financial Officer
| |  | --------------------------------------------------------------------

Date: June 26, 2007



---

---

# EXHIBIT INDEX

|ExhibitNumber |  | Description
|------------- |  | -----------

|1.1 |  | Articles
of Association of Shamir (incorporated by reference to Exhibit 3.1 to our registration
statement on Form S-8 (File No. 333-137628), filed                    with the SEC on
September 28, 2006)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 |  | Lease
Agreement dated December 1, 2003, between Kibbutz Eyal and Eyal Optical Industries (1995)
Ltd. (incorporated by reference to Exhibit 10.1 to                    our registration
statement on Form F-1 (File 333-122736), filed with the SEC on February 11, 2005)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Working
Services Agreement dated February 9, 2005, between Shamir and Kibbutz Shamir
(incorporated by reference to Exhibit 10.2 to our registration
                   statement on Form F-1 (File 333-122736), filed with the SEC on
February 11, 2005)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Service
Agreement dated February 9, 2005, between Shamir and Kibbutz Shamir (incorporated by
reference to Exhibit 10.3 to our registration                    statement on Form F-1
(File 333-122736), filed with the SEC on February 11, 2005)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | Lease
Agreement dated December 27, 1990, between Kibbutz Shamir and the Israel Lands
Administration (incorporated by reference to Exhibit 10.4 to                    our
registration statement on Form F-1 (File 333-122736), filed with the SEC on February 11,
2005)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | Sublease
Agreement dated  January 1999 between Shamir and Kibbutz Shamir, including amendment
(incorporated by reference to Exhibit 10.5 to our                    registration
statement on Form F-1 (File 333-122736), filed with the SEC on February 11, 2005)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | Loan
Agreement between Shamir and Kibbutz Shamir (incorporated by reference to Exhibit 10.6
 to our registration statement on Form F-1 (File                    333-122736), filed
with the SEC on February 11, 2005)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | Shareholders'
Agreement dated February 9, 2005,among the shareholders of Shamir (incorporated by
reference to Exhibit 10.7 to our registration                    statement on Form F-1
(File 333-122736), filed with the SEC on February 11, 2005)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | Registration
Rights Agreement dated February 7, 2005, between Shamir and certain of its shareholders
(incorporated by reference to Exhibit 10.8 to                     our registration
statement on Form F-1 (File 333-122736), filed with the SEC on February 11, 2005)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | Lease
Agreement dated March 8, 2007, between Shamir and Kibbutz Shamir
|--- |  | ----------------------------------------------------------------------

|4.10 |  | Service
Agreement dated March 8, 2007, between Shamir Special Optical Products Ltd. and Kibbutz
Shamir
|---- |  | ------------------------------------------------------------------------------------------------------

|4.11 |  | Israeli
Plan For The Allotment of Shares/Options For 2003 (English translation) (incorporated by
reference to Exhibit 99.1 to our registration                       statement on Form S-8
(File No. 333-137628), filed with the SEC on September 28, 2006)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.12 |  | Summary
of Stock Option Grant dated June 5, 2000 (incorporated by reference to Exhibit 99.2 to
our registration statement on Form S-8 (File No.                      333-137628), filed
with the SEC on September 28, 2006)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.13 |  | 2005
General Share and Incentive Plan (incorporated by reference to Exhibit 99.3 to our
registration statement on Form S-8 (File No. 333-137628),                filed with the
SEC on September 28, 2006)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | Table
of subsidiaries of Shamir
|--- |  | -------------------------------

|11.1 |  | Code
of Ethics of Shamir (incorporated by reference to Exhibit 11 to our annual report on Form
20-F filed with the    SEC on June 28, 2005)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|12.1 |  | Certification
of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- |  | ------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of the Chief Financial Officer pursuant to Section  302 of the Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------------------------

|13.1 |  | 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
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15.1 |  | Consent
of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global
|---- |  | -------------------------------------------------------------------------



---

---