|As
filed with the Securities and Exchange Commission on June 18, 2009
|---------------------------------------------------------------------

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# SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549

# FORM 20-F

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

# OR

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

# For the fiscal year
ended December 31, 2008

# OR

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

# For the transition
period from ____________ to

# 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 ShamirUpper Galilee
12135 Israel(Address of principal executive offices) |                               

Mr. David Bar-Yosef, General CounselTelephone Number: +972-4-6947810; E-Mail: davidby@shamir.co.il,
(Name, Telephone, E-mail and/or Facsimile number and Address of the Registrant's Contact Person)

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

|                                         |                                           
|---------------------------------------- | ------------------------------------------
|
|
|
|
|Title of each class:                     | Name of each exchange on which registered:
|Ordinary Shares, par value NIS 0.01 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: 16,423,740 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



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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 basis of
accounting the registrant has used to prepare the financial statements included in this
filing:

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

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

Item 17 o Item 18 o

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

Yes o No x



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# TABLE OF CONTENTS

|                           |           |                                                                              |   
|-------------------------- | --------- | ---------------------------------------------------------------------------- | --
|
|
|
|
|CERTAIN DEFINED TERMS      | 1        
|                          
|FORWARD-LOOKING STATEMENTS | 1        
|                          
|PART I                     | 2        
|                           | ITEM 1.   | IDENTITY OF DIRECTORS; SENIOR MANAGEMENT AND ADVISERS                        | 2 
|                           | ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                      | 2 
|                           | ITEM 3.   | KEY INFORMATION                                                              | 2 
|                           | ITEM 4.   | INFORMATION ON THE COMPANY                                                   | 18
|                           | ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                    | 33
|                           | ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 34
|                           | ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 48
|                           | ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 58
|                           | ITEM 8.   | FINANCIAL INFORMATION                                                        | 66
|                           | ITEM 9.   | THE LISTING                                                                  | 67
|                           | ITEM 10.  | ADDITIONAL INFORMATION                                                       | 69
|                           | ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 82
|                           | ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 82
|                          
|PART II                    | 83       
|                           | ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 83
|                           | ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 83
|                           | ITEM 15T. | CONTROLS AND PROCEDURES                                                      | 84
|                           | ITEM 16.  | [RESERVED]                                                                   | 85
|                           | ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 85
|                           | ITEM 16B. | CODE OF ETHICS                                                               | 85
|                           | ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 85
|                           | ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 86
|                           | ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 86
|                           | ITEM 16F. | CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT                                 | 86
|                           | ITEM 16G. | CORPORATE GOVERNANCE                                                         | 86
|                          
|PART III                   | 87       
|                           | ITEM 17.  | FINANCIAL STATEMENTS                                                         | 87
|                           | ITEM 18.  | FINANCIAL STATEMENTS                                                         | 87
|                           | ITEM 19.  | EXHIBITS                                                                     | 87



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# 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 the 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. (Shamir
Insight), 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, 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, Shamir
Relax, Autograph Relax, Sport Attitude, Shamir Smart Office,
Shamir Smart Attitude, Shamir Smart Single Vision, Shamir Freeform
Geometry and 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;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
political, economic, trade restriction, staffing, contract enforcement, tax and other
risks      associated with international operations;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | the
effects of the worldwide economic conditions;
|- | -------------------------------------------------

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

| | 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
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.

1

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# PART I

ITEM 1. IDENTITY OF DIRECTORS;
SENIOR MANAGEMENT AND ADVISERS

Not applicable.

# ITEM 2. OFFER STATISTICS
AND EXPECTED TIMETABLE

Not applicable.

# ITEM 3. KEY INFORMATION

# 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 16,423,740
ordinary shares outstanding. See also Item 10. Additional InformationShare
Capital.

# 3.A SELECTED FINANCIAL
DATA

The
following selected consolidated financial data as of December 31, 2007 and 2008 and for
the years ended December 31, 2006, 2007 and 2008 have been derived from our audited
consolidated financial statements. These financial statements have been prepared in
accordance with generally accepted accounting principles in the United States, or U.S.
GAAP, and audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young
Global. The selected consolidated statement of income data as of December 31, 2004, 2005
and 2006, and the selected consolidated balance sheet data for the years ended December
31, 2004 and 2005, have been derived from other consolidated financial statements not
included in this annual report and have also been prepared in accordance with U.S. GAAP
and audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global.

The
selected consolidated financial data set forth below should be read in conjunction with
and are qualified by reference to Item 5, Operating and Financial Review and
Prospects and the Consolidated Financial Statements and notes thereto and other
financial information included elsewhere in this annual report.

2

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|                                                              | Year Ended December 31,
|------------------------------------------------------------- | -----------------------
|
|
|
|
|(Dollars in thousands, except per share
data)                 |                        
|                                                              |                        
|STATEMENT OF OPERATIONS DATA:                                 |                        
|Revenues, net                                                 |                        
|Cost of revenues(1)                                           |                        
|                                                              |                        
|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 gain (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                                                       |                        

3

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|                           | As of December 31,
|-------------------------- | ------------------
|
|
|
|
|(Dollars in thousands)     |                   
|                           |                   
|FINANCIAL POSITION DATA:   |                   
|Cash and cash equivalents  |                   
|Short term investment      |                   
|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)     |                        
|                           |                        
|Cost of revenues           |                        
|Research and development   |                        
|Selling and marketing      |                        
|General and administrative |                        
|                           |                        
|Total                      |                        
|                           |                        

|(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 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 | 2004 | 2005 | 2006 | 2007  | 2008
| | -------- | ---- | ---- | ---- | ----- | ----
|
|
|
|
| | EUR      |      |      |      | 0.794 |     
| | NIS      |      |      |      | 4.482 |     

On June 15, 2009, the
exchange rate was NIS 3.965 per $1.00 and 0.722 per $1.00, as reported by the Bank
of Israel.

4

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# 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.

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.

5

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The
U.S. ophthalmic market is characterized by a large number of laboratories, independent and
non-independent, as well as large national retail chains and buying groups, some of which
own their own laboratories. We distribute our products to independent and non-independent
laboratories, which distribute our products to the ophthalmic market. The laboratories in
the U.S. sell both their own products as well as products of other manufacturers like us.
If a large number of non-independent laboratories, buying groups or retail chains cease to
purchase our products due to a change in internal purchasing policies, or if the number of
independent laboratories decreases, it could have an adverse impact on our sales and our
results of operations in the U.S.

The
European ophthalmic market, relative to the U.S. market, has a smaller number of optical
laboratories. Non-independent laboratories control a major share of the European market,
and sell mainly their own products. We sell our products in Europe mainly through our own
laboratories and distribution channels to opticians and retail chains.

In the rest of the world we sell our products through our laboratories to opticians or to independent or
non-independent laboratories. If one or more of such laboratories cease to purchase our products due to
a change in internal purchasing policies, it could have an impact on our sales and our results.

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 2008, we generated approximately
68.6% of our revenues from sales outside of Israel and the United States, including 50.1%
in Europe. We also sell our products in Australia, Canada, South Africa, Central and South
America, China and several additional countries. An integral part of our expansion
strategy is to enter new foreign markets, principally in Central and South America and
Asia, 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,
Central 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
in enforcing agreements and collecting receivables through certain foreign legal systems,
in particular in developing markets in Asia, Central 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 local foreign currencies;
|- | --------------------------------------------------------------------------------------------

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

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

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

6

---

---

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.

Current economic
conditions may adversely affect our industry, business and results of operations.

The
global economy is currently undergoing a period of substantial contraction, and the future
economic environment is likely to be less favorable than that of recent years. This has
led to reduced consumer and governmental spending, which may drive to decrease prices in
the ophthalmic market. These events may have an adverse effect on our revenues, as well as
on our ability to raise capital or debt at an attractive cost of capital.

We
conduct our operations in Israel and throughout the world, including in Europe and in the
U.S. In 2008, our sales to customers in Europe constituted approximately 50.1% of our
revenues, while our sales to customers in the U.S. constituted approximately 29.1% of our
revenues. A continued economic slowdown, recession or sustained loss of consumer
confidence in the markets in which we sell our products, especially in the European and
U.S. markets, could trigger a decline in demand for our products that may adversely affect
our results of operations.

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

We
operate globally, and our financial results are subject to both transaction and
translation effects resulting from fluctuations in currency exchange rates. We generate
our revenues primarily in Euros and dollars, and we incur a significant portion of our
expenses, principally salaries and related expenses of our staff in Israel, in NIS. In
2008 we generated approximately 31.5% of our revenues in dollars and 48.3% in Euros, and
we incurred approximately 18.0% of our operating expenses in NIS, 32.2% in dollars and
38.6% in Euros. Exchange rate fluctuations between the dollar and the Euro and between the
dollar and the NIS 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 U.S. dollar zone
into dollars at the average rate for each reporting period. 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. As of December 31, 2007, the NIS exchange rate
appreciated against the dollar by 9.0% and the Euro exchange rate appreciated against the
dollar by 10.5%. As of December 31, 2008, the NIS exchange rate appreciated against the
dollar by 1.1% and the Euro exchange rate devaluated against the dollar by 5.6%.

The
NIS annual average rate in 2007 and 2008 appreciated against the dollar by 7.8% and 12.7%
respectively, and the Euro annual average rate appreciated against the dollar by 8.3% and
6.6%, respectively, which had an adverse effect on our results of operations.

Another
currency exchange risk we face is translation risk in companies were the measurement of
taxable income is in a different currency than the functional currency. When coming to
measure our taxable income in these companies, we translate the operating results from the
functional currency to the currency in which the taxable income is measured. Therefore,
translation differences in the financial statements may differ from those recognized for
tax purposes. This exchange risk may dramatically affect our effective income tax rate.

7

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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.

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

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

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

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

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

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

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

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, which would have a material adverse effect on our sales and results of operations.

Our main manufacturing
facilities are located in Israel and Portugal. 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 and in Portugal. Raw materials and finished
product inventories are also stored at these facilities. Although these facilities are in
several separate locations, a disruption of our operations or damage to any of these
facilities, whether as a result of fire, natural disaster, act of war, terrorist attack,
plague 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. For risks relating to our facilities in Israel, see also
Risks Relating to our Operations in Israel.

In
addition, we have some additional manufacturing facilities in Turkey and Mexico, that are
smaller and less significant than those that are mentioned above. Nevertheless, a
disruption of our operations or damage to any of these facilities, whether as a result of
fire, natural disaster, act of war, terrorist attack, plague or otherwise, could affect
our ability to deliver products on a timely basis and could affect our results of
operations.

8

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

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

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

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

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

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

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

Furthermore,
we can not 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. 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 a large lens manufacturer that certain of our products
infringe a patent claimed by such manufacturer. In addition, we have also received notice
from a shareholder of one of our subsidiaries claiming unlawful use of such
subsidiarys intellectual property and unjust enrichment. See Item 8. Financial
InformationLegal Proceedings.

9

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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.

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
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. If we continue
to experience such rapid growth, we cannot assure you that we will have adequately
considered all costs and risks associated with such future expansion, or that our systems,
procedures and managerial controls will be adequate to support such expanded operations.
If our systems, procedures or controls prove inadequate to support such future extended
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.

10

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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 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. Any of these
factors could harm our business, financial condition and results of operations.

We have 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 might have an adverse effect on our business and results of operations.

We
have non-wholly-owned subsidiaries for certain parts of our foreign operations. We are
also distributing our products to 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 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 tax consequences to us. In addition, these
payments or loans are contingent on the results of operations of the particular
subsidiaries and are subject to various business considerations.

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

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 and polycarbonate lenses. We purchase our raw materials from some of
these suppliers. A change of supplier may cause us a high expense.

A certain part of the production process of our lenses is supplied by a limited number of worldwide
subcontractors, some of which own a worldwide recognize trademark for their process and product. In
addition, our competitors control some of these subcontractors.

The
loss of any one of these suppliers or subcontractors, would require us to obtain these
materials or services elsewhere. Because these markets are dominated by a small number of
suppliers or subcontractors, there is the risk of a price cartel or monopoly. Our larger
competitors may be able to purchase more supplies or subcontractors at any given time than
we are and may therefore achieve lower prices than we do or prevent us from receiving such
services. 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 such raw materials or services from our suppliers (or alternative suppliers) or
subcontractors at acceptable prices, we may realize lower margins and experience
difficulty in meeting our customers requirements.

11

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We have several large
customers to which we sell our products.

We
have five large customers that collectively accounted for approximately 30.3% of our
revenues during 2008. In addition, our largest customer accounted for approximately 12.6%
of our revenues during 2008. The remaining 69.7% of our revenues are spread across a large
number of customers in various geographic locations, and no other customer, other than our
five largest customers, accounted for more than 3.5% of our revenues. Nevertheless, if one
of our large customers were to cease purchasing our products, partially or entirely, it
could cause a decrease in our total revenues.

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. 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:

| | foreign
currency exchange rate fluctuations;
|- | --------------------------------------------

| | 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 worldwide 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.

12

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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. If any of these key personnel should leave our employ 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, marketing, financial and management personnel.

# 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, 2009, our majority shareholder, Kibbutz Shamir, holds approximately 59.04% of
our outstanding ordinary 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, security and facilities
maintenance, and other services. For more information please see Item 7. Major
Shareholders and Related Party Transactions.

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

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

Our
headquarters and certain manufacturing facilities are located on the premises of Kibbutz
Shamir, which is our majority shareholder. 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. Major Shareholders and Related Party Transactions .

13

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

Certain
of our directors, officers and key employees are members of Kibbutz Shamir, which is our
majority shareholder. Some of these individuals are also members of the management board
of Kibbutz Shamir. These persons will have fiduciary duties to both us and Kibbutz Shamir.
As a result, they may have real or apparent conflicts of interest on matters affecting
both us and Kibbutz Shamir and in some circumstances may have interests adverse to ours.
Currently, two members of our board of directors (including our chairman), and two of our
executive officers are members of Kibbutz Shamir and members of Kibbutz Shamirs
management board. 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;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.

14

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

Those
of our shareholders who held shares prior to the initial public offering of our ordinary
shares in March 2005, hold approximately 69.24% of our outstanding shares as of June 15,
2009. These shareholders are not contractually prohibited from transferring our shares.
See  Item 7. Major Shareholders 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.

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

The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.
Our efforts to comply with the requirements of Section 404, which started in connection
with our Annual Report on Form 20-F for the fiscal year ended December 31, 2007, have
resulted in increased general and administrative expense and a diversion of management
time and attention, and we expect these efforts to require the continued commitment of
resources. Section 404 of the Sarbanes-Oxley Act of 2002 requires (i) managements
annual review and evaluation of our internal control over financial reporting and (ii) an
attestation report issued by an independent registered public accounting firm on our
internal control over financial reporting, in connection with the filing of our Annual
Report on Form 20-F for each fiscal year (such requirement is currently expected to be
applicable to us starting with our Annual Report on Form 20-F for the fiscal year ending
December 31, 2009). We have documented and tested our internal control systems and
procedures in order for us to comply with the requirements of Section 404. While our
assessment of our internal control over financial reporting resulted in our conclusion
that as of December 31, 2008, our internal control over financial reporting was
effective, we cannot predict the outcome of our testing in future periods. If we fail to
maintain the adequacy of our internal controls, we may not be able to ensure that we can
conclude on an ongoing basis that we have effective internal controls over financial
reporting. Failure to maintain effective internal control over financial reporting could
result in investigation or sanctions by regulatory authorities, and could have a material
adverse effect on our operating results, investor confidence in our reported financial
information, and the market price of our ordinary shares.

Our shares are listed for
trade on more than one stock exchange, and this may result in price variations.

Our
ordinary shares are listed for trading on the Nasdaq Global Market and on the Tel Aviv
Stock Exchange. This may result in price variations. Our ordinary shares are traded on
these markets in different currencies, U.S. dollars on the Nasdaq Global Market and New
Israeli Shekels on the Tel Aviv Stock Exchange. These markets have different opening times
and close on different days. Different trading times and differences in exchange rates,
among other factors, may result in our shares being traded at a price differential on
these two markets. In addition, market influences in one market may influence the price at
which our shares are traded on the other.

15

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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.

# Risks Relating to Our
Operations in Israel

Conducting business in
Israel entails special risks.

Our
headquarters and main research and development department, and part of our manufacturing
facilities, are located in the State of Israel, some of our key employees, 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. 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. Further, the establishment of a Hamas government
in Gaza and the recent battles during January 2009, have created additional unrest and
uncertainty in the region. There is no indication as to how long the current hostilities
will last or whether there will be any further escalation nor as to how the current
negotiations with the Syrian government will develop. 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.

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

Many
of our officers and employees in Israel, including certain key employees, are obligated to
perform annual reserve duty in the Israeli army and are subject to being called up for
reserve duty at any time. The obligation to perform compulsory military reserve service on
an annual basis extends up to a maximum age of 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, and
deriving a certain level of the revenues related to those facilities from exports outside
of Israel. 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, most of 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. Most of 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.

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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 on the
development and production of progressive lenses. In 1997 we acquired 25% of Eyal Optical
Industries (1995) Ltd. (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 and other
founders, 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 our
European operation 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 July 2004, we purchased Interoptic S.A.R.L., a local French
distributor. In September 2004, we purchased the Cambridge Optical Group, through which we
gained control in Shamir UK Limited.

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, we established a laboratory facility in Turkey, Altra Optik Sanayi ve
Ticaret A.S. In establishing this facility, our subsidiary acquired the assets of the
laboratory from another laboratory in Turkey.

On
September 30, 2005, we completed the purchase of an additional 31.3% stake in Shamir
Insight from Severn Confirmers & Forwarders, Ltd. In April 2005, we purchased 2% of
Shamir Insight from one of its minority shareholders, and in July 2007, we purchased the
remaining 10% from an additional minority shareholder, following which we are the sole
shareholder of Shamir Insight.

On
December 1, 2005, we formed a subsidiary in France, Shamir France S.A.R.L., in order to
establish and operate 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.

In
January 2006, SSOP and Einit Ltd., a well known local distributor of lens and frames in
the Israeli market, established a subsidiary, Shamir Einit Ltd., to distribute
Shamirs lenses in the Israeli market. In August 2007, in two separate transactions,
we purchased both Einits as well as SSOPs holdings in Shamir Einit following
which we are the sole shareholder of Shamir Einit. In addition, on July 31, 2007, Shamir
Einit changed its name to Shamir Israel Optical Marketing Ltd. (Shamir
Israel).

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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.
(CIO), a local laboratory and distributor in Mexico. In addition, On November
1, 2006, we established a distribution company, Shalens S.A. de C.V.
(Shalens), with local strategic partners. On February 20, 2008, we exercised
our option to purchase an additional 25% of each of CIO and Shalens, following which we
currently hold 51% of the outstanding shares of each of CIO and Shalens.

In
January 2007, we finalized a purchase of 25.8% in Siam Optical Technology Company Ltd.
(SOT), through which we operate a local laboratory in Thailand. On July 26,
2008, we executed an amendment to the SOT share acquisition agreement following which we
increased our holdings in SOT to 40.4%.

On
July 1, 2008, we executed an agreement following which we purchased the remaining 49%
of Shamir Optic GmbH (formally know as Altra Trading GmbH) and gained full
control of our European subsidiaries.

On
November 1, 2008, we have executed an agreement following which we purchased through
Spherical Optics (PTY) Ltd. holdings in a local laboratory in South Africa, Optispeed
Laboratory (PTY) Ltd.

During
the fourth quarter of 2008 we executed several internal changes in the structure of our
European holdings following which we gained direct holdings in Shamir UK Limited and in
our Turkish operation, and Shamir UK became the holding company of the remaining European
subsidiaries.

We
financed our 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.

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. Our agent for service
of process in the United States is Shamir USA, 29800 Agoura Rd., Suite 102, Agoura Hills,
CA, 91301-2559.

# 4.B BUSINESS OVERVIEW

# Introduction

We
are a leading provider of innovative products and technology to the spectacle lens market,
with a particular focus on the progressive and sophisticated 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, Shamir Smart 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.

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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 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 type of products, including frames,
spectacle lenses, contact lenses ,optical accessories, medical and military products. 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.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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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 world population
over the age of 45 will grow.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Advancements
in Lens Technologies. Over the past five years, 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.

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Market Structure

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

Patient
 Optical Doctor &  Optometrist
 Optical Laboratory
 Manufacturer/  Research & Development


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 and distributors of spectacle lenses. Our main
competitors include Essilor, Zeiss (merged with Sola), Hoya, Younger and Rodenstock for
the production and marketing of spectacle lenses. 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 and distribution centers that 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, marketing 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 2008. We also believe
that our research and development services gives us a competitive advantage over other
progressive lens manufacturers.

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.

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.

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Distribution Channels

We
have currently two separate distribution platforms for our two principal markets, the
United States and Europe, which are specifically tailored to our target customers in each
market. Our sales via our European subsidiaries, mainly to European based operations,
accounted for $71.9 million, or 51.2%, of our revenues in 2008, and sales mainly in the
United States, via Shamir Insight, accounted for $27.6 million, or 19.7% during the same
period.

In
Europe, we sell our products directly to retail optical shops through our vertically
integrated optical laboratories in Portugal, and Turkey, as well as through our
distribution centers in Spain, France, Germany and the United Kingdom. In addition, we
sell our products through our European subsidiaries and clients from other parts of the
world.

In
the United States, we distribute our products to opticians through laboratories.
Laboratories in the U.S. sell their own products as well as the products of different
manufactures, like us. There are currently more than 300 laboratories in the U.S. As of
today, we have not yet established or acquired an optical laboratory in the United States.
We have expanded our U.S. sales via Shamir Insight from approximately $8.7 million in 2003
to approximately $24.7 million in 2008, representing a compound annual growth rate of
23.2%.

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 companies. By providing these services, we
are able to generate revenues and further expand our intellectual property base. 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. 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 and to enhance our financial results. As laboratories adopt the
Freeform Technology and use this technology 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 approximately 59.04% of our outstanding shares
as of June 15, 2009. Kibbutz Shamir was founded in 1944 and is a small communal society of
approximately 300 members, including approximately 42 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.

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 the chairman of
our board, and an additional two executive officers, are members of the management board
of Kibbutz Shamir.

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# Growth Strategy

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

Maintain Technological
Leadership

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

Capitalize on Positive
Demographic Trends and Increase Penetration

Given
our strategic focus on progressive lenses, we believe that we are well positioned to
benefit from the positive demographic trends in developed countries and the increased
penetration of progressive lenses in developed and developing regions. Because Presbyopia
is an age-related process that affects almost all individuals above the age of 45, we
believe 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 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 Australia, Central and South America, China, India, other
Asian countries 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 agreements so that they expand distribution of
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.

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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. 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 optical laboratories and we intend to
increase the number of laboratories to whom we provide this production technology.

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. We believe that they
represent the fastest growing segment for progressive lenses and provide enhanced profit
margins. We believe this strategy will improve the performance of our products and
generate increased sales.

# 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 2008, revenues from our sales of lenses accounted for
96.4% of our total revenues, while revenues from our sales of design services and other
accounted for 3.6% of our total revenues.

Lenses

Premium
Lenses. We believe that we have been one of the market leaders 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.

Freeform
Lenses. In addition to our premium lens offerings described above, we also produce
lenses under the Shamir Autograph and Shamir Smart brands using our proprietary Freeform
production method known as Direct Lens Technology, a technology which we released in 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 providing
this technology to selected laboratory customers to allow them to produce these advanced
lenses tailored to meet their patients unique requirements, for which we receive
fees according to usage.

25

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The
following table shows our primary brands of lenses.

|Brand            | Characteristics                                 | Available Materials   
|---------------- | ----------------------------------------------- | ----------------------
|
|
|
|
|Shamir Genesis   | All-purpose progressive lens.                   | Plastic, Glass, Trivex
|                
|Shamir Office    | Designed for visual clarity from 1.3 ft. to 10  | Plastic, Glass,       
|                 | ft. Allows comfort for people working in closed | Polycarbonate         
|                 | environments.                                  
|                
|Shamir Piccolo   | Designed to fit into any small frame.           | Plastic, Glass,       
|                 |                                                 | Polycarbonate         
|                
|Shamir Attitude  | Designed to fit "Wrap - Around" frames.         | Plastic, Polycarbonate
|                
|Shamir Creation  | Flat lens fit for fashionable frames.           | Plastic, Glass,       
|                 |                                                 | Polycarbonate         
|                
|Shamir Autograph | Customized back surface progressive lens.       | Plastic Polycarbonate 
|                 | Produced using Freeform Technology.            
|                
|Shamir  Smart    | Customized back surface aspheric single vision  | Plastic, Trivex,      
|                 | lens. Produced using Freeform Technology.       | Polycarbonate         

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. 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 49 engineers, mathematicians,
physicists, chemists, programmers and optical technicians, is in our opinion 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.

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.

26

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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 and designers of plastic lenses. We
believe we have gained a reputation in the design services market as a quality leader.

Lenses

Our
marketing strategy in the United States differs from 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 semi finished progressive lenses in the United States requires a larger
marketing force and greater presence in order to reach as many optical shops as possible.

27

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United
States. The U.S. ophthalmic market is characterized by a large number of laboratories,
independent and non-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 laboratories, using our marketing subsidiary
Shamir Insight. 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. 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 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.

Europe. We
market and sell our products through our European subsidiaries. Our European
          subsidiaries rely on two primary distribution channels. The first channel is
          comprised of our distribution centers and optical laboratories in Germany,
          Portugal and Turkey. From these locations, we distribute prescription, single
          vision, and progressive lenses and offer a variety of stock 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           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 and Other Lens Manufacturers. We sell our lenses to other lens
manufacturers through our U.S. based subsidiary, Shamir USA. 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
Europe and the U.S. 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 40.4% of a local laboratory and distributor in
Thailand, and 51% of a local laboratory and distributor 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.

28

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# Customers

Our
customers are optical laboratories, national retail chains, retail buying groups and
opticians for spectacle lenses and third-party lens manufacturers for design services.
During 2008, our five largest customers collectively accounted for 30.3% of our revenues.
Our largest customer accounted for approximately 12.6% of our revenues during 2008. The
remaining 69.7% of our revenues are spread across a large number of customers in various
geographic locations, and no other customer, other than our five largest customers,
accounted for more than 3.5% of our revenues.

# Manufacturing Operations

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

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. In some cases, we use a third party subcontractor in order to turn the lens into
a photo-chromatic lens, per clients 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
Semi-Finished Polycarbonate Lenses

Raw
Material. We purchase raw material from leading manufacturers of polycarbonate.

Process. The
polycarbonate raw material is injected after heating into dedicated molds           that
are assembled in an injection machine. The material is cooled down in the           mold
and once it achieves a desired temperature, the molds are opened and the           lenses
are pulled out and transferred to a cleaning and hard coating system.

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

29

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Production of Finished
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 lenses so that the lenses are made according
to the prescription requested by the optometrist. We also provide this production method
to several optical laboratory customers to allow the production of customized lenses with
greater optical accuracy. Using this technology, a spherical semi-finished 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.

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.

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 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. This production technology involves fewer
steps and results in higher surface accuracy than traditional production.

30

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Freeform Lens Calculation
Software (Prescriptor), 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 customers facilities and we get paid based on usage of this
technology, 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, 2008, we hold seven patents and two pending patent applications owned by
us, one patent and three pending patent applications owned by SSOP, and five patents
owned by our partially owned subsidiary Inray Ltd. These patents cover 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, 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, Shamir Relax, Autograph Relax, Sport Attitude, Shamir Smart
Office, Shamir Smart Attitude, Shamir Smart Single Vision, Shamir
Freeform Geometry and 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.

# 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 of the U.S. Food and
Drug Administration for the sale of lenses. The drop-ball impact test involves dropping a
steel ball of specified size from a specified height onto the center of a lens with a
specific size. The lens passes the test if it does not break.

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

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

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

31

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# 4.C ORGANIZATIONAL
STRUCTURE

In
furtherance of our focus on innovative research and development projects, we have acquired
equity interests in companies in the optical field. The following chart shows the names
and locations of our direct and indirect 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 17.52% Siam Optical Technology Company Ltd. Bangkok, Thailand 40.4% Inray Ltd. K. Shamir, Is. 50% (1) Shamir Optic GmbH Niederau, Ger. 100% Shamir Insight, Inc. San Diego, CA 100% 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 Israel Optical Marketing Ltd. K. Shamir, Is. 100% Shamir Or Ltd. K. Shamir, Is. 100% Centro Integral Optico S.A. de C.V. Mexico City, Mex. 51% Shalens S.A. C.V. Mexico City, Mex. 51%


|
|

|(1) | Shamir
has a 50.03% ownership interest and holds 50% of the voting rights in           Inray
Ltd.
|--- | -------------------------------------------------------------------------------------------------

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

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

| | Shamir
USA, 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.
|- | -------------------------------------------------------------------------------

| | Shamir
Optic GmbH is a distribution company located in Germany. We hold 100% ownership of Shamir
Optic GmbH.
|- | ------------------------------------------------------------------------------------------------------------

| | Inray
Ltd. is a research and development company jointly owned by us, the Technion Israel
     Institute of Technology and two of its researchers.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------

| | e-Vision,
LLC, through its partially owned subsidiaries PixelOptics, Inc., Ocular Optics, Inc.
     and SolBeam, Inc., is developing and marketing lenses.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Spherical
Optics (PTY) Ltd. is our local distributor in South Africa. Through Spherical we hold
     25% of Optispeed Laboratory (PTY) Ltd., a local laboratory.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Shamir
UK Limited a distributor in the United Kingdom. Following recent changes in the structure
of our European subsidiaries Shamir UK Limited is the holding company of most of our
European subsidiaries.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shamir
Special Optical Products Ltd. is an optical laboratory and a manufacturer of semi
     finished polycarbonate lenses located in Kibbutz Shamir.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------

32

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| | Shamir
Israel Optical Marketing Ltd. is our local distributor to the Israeli market.
|- | ------------------------------------------------------------------------------------

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

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

| | Siam
Optical Technology Company Ltd. is a company through which we operate a local laboratory in
Thailand.
|- | ----------------------------------------------------------------------------------------------------------

# 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, finished lenses and semi-finished glass, plastic and
polycarbonate 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, in
Kibbutz Eyal and in Kibbutz Shamir, cover approximately 17,483 square meters of
manufacturing, warehouses and office space.

We
also own optical laboratories in Portugal, Turkey and Mexico, which occupy approximately
4,000 square meters, 1,496 square meters and 2,758 square meters of owned and leased
manufacturing and office space, respectively. Our distributors in France, Germany, Spain,
United Kingdom and South Africa also lease or own storage and office facilities in which
they conduct their operations.

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

|Name/Location              | Company                                                                                                                                                 | Primary Use                                                                                                                | Size   | Leased/Owned 
|-------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ------ | -------------
|
|
|Kibbutz Shamir, Israel     | Shamir  Optical   Industry Ltd.;Shamir   Special   Optical Products Ltd.;Shamir   Israel    Optical
                      Marketing Ltd.;Shamir Or Ltd. | Headquarters; Administration; Marketing;Research and  Development;
                       Optical Laboratory;Manufacturing | 13,486 | Leased       
|                           |                                                                                                                                                         |                                                                                                                            |        |              
|Kibbutz Eyal, Israel       | Eyal  Optical Industries (1995) Ltd.                                                                                                                    | Manufacturing;
                                       Distribution warehouse                                               | 3,997  | Leased       
|                           |                                                                                                                                                         |                                                                                                                            |        |              
|Vilar, Portugal            | Shamir Portugal, LDA                                                                                                                                    | Optical        laboratory,
                                                 Distribution                                   | 4,000  | Owned        
|                           |                                                                                                                                                         |                                                                                                                            |        |              
|Madrid, Spain              | Shamir Optical Espana S.L.                                                                                                                              | Distribution                                                                                                               | 570    | Leased       
|                           |                                                                                                                                                         |                                                                                                                            |        |              
|Collegien, France          | Shamir France S.A.R.L.                                                                                                                                  | Distribution                                                                                                               | 5,782  | Capital Lease
|                           |                                                                                                                                                         |                                                                                                                            |        |              
|Paris, France              | Interoptic S.A.R.L.                                                                                                                                     | Distribution                                                                                                               | 250    | Leased       
|                           |                                                                                                                                                         |                                                                                                                            |        |              
|Istanbul, Turkey           | Altra   Optik   Sanayi  ve Ticaret A.S.                                                                                                                 | Optical        laboratory; Distribution                                                                                    | 1,496  | Owned        
|                           |                                                                                                                                                         |                                                                                                                            |        |              
|Niederau, Germany          | Shamir Optic GmbH                                                                                                                                       | Distribution warehouse                                                                                                     | 3,925  | Owned        
|                           |                                                                                                                                                         |                                                                                                                            |        |              
|Cambridge, United Kingdom  | Shamir UK Limited                                                                                                                                       | Distribution                                                                                                               | 1,001  | Leased       
|                           |                                                                                                                                                         |                                                                                                                            |        |              
|San Diego, California      | Shamir Insight, Inc.                                                                                                                                    | Distribution                                                                                                               | 1,687  | Leased       
|                           |                                                                                                                                                         |                                                                                                                            |        |              
|Agoura Hills, California   | Shamir USA                                                                                                                                              | Distribution                                                                                                               | 133    | Leased       
|                           |                                                                                                                                                         |                                                                                                                            |        |              
|Mexico City, Mexico        | Centro   Integral   Optico S.A. de C.V.                                                                                                                 | Optical        laboratory, Distribution                                                                                    | 2,758  | Leased       
|                           |                                                                                                                                                         |                                                                                                                            |        |              
|Johannesburg, South Africa | Spherical   Optics   (Pty) Ltd.                                                                                                                         | Distribution                                                                                                               | 450    | Leased       

# ITEM 4A. UNRESOLVED
STAFF COMMENTS

Not applicable.

33

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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 spectacle lens market,
with a particular focus on the progressive and sophisticated 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 all kind of lenses to opticians,
and utilize our capabilities to provide design services to optical lens manufacturers
under service, and royalty agreements. Our leading lenses are marketed under a variety of
trade names, including Shamir Genesis, Shamir Piccolo, Shamir Office, Shamir Creation,
Shamir Smart 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. 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 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. See Item 3. Key Information
 Corporate Reorganization.

# 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 most of our European subsidiaries is the Euro. In addition, we have
certain worldwide subsidiaries with various local currencies as their functional currency.
Accordingly, the assets and liabilities of  these subsidiaries are translated at the
year-end exchange rate, and statement of income items are translated at the average
exchange rate during the reported period.

We
generate our revenues primarily in Euros and U.S. 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. As of December 31, 2007, the NIS exchange rate
appreciated against the U.S. dollar by 9.0% and the Euro exchange rate appreciated against
the U.S. dollar by 10.5%. As of December 31, 2008, the NIS exchange rate appreciated
against the U.S. dollar by 1.1% and the Euro exchange rate devaluated against the U.S.
dollar by 5.6%.

34

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The
NIS annual average rate in 2007 and 2008 appreciated against the U.S. dollar by 7.8% and
12.7% respectively, and the Euro annual average rate appreciated against the U.S. dollar
by 8.3% and 6.6%, respectively, which had an adverse effect on our results of operations.

# Revenues

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 five 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 2004 to 2008, revenues from the sale of lenses increased by
approximately 20.4% annually while revenues from design services slightly decreased during
the period. We anticipate that revenues from the sale of lenses will continue to provide
the majority of our revenues.

# Lenses

Our
primary source of revenues is the sale of semi-finished lenses, finished progressive
lenses and other lenses. Semi-finished lenses are sold through our principal fully-owned
subsidiaries in the US and Europe; finished lenses and other lenses are sold mainly in
Europe through our local subsidiaries. Revenues from lenses are recognized when delivery
has occurred. Our revenue from Freeform technology is steadily increasing.

# Design Services

We
also generate revenues from design services that we provide to third party manufacturers.
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. 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 our European subsidiaries, which increased its sales
from $53.3 million in 2006 to $71.9 million in 2008. In addition, Shamir Insight,
increased its sales over the same period from $23.3 million to $27.6 million. . We also
sell lenses through local distributors and to other third party manufacturers in other
countries, which sales increased from $13.8 million in 2006 to $35.8 million in 2008, part
of this increase is attributed to the sales of our Mexican subsidiaries which are
consolidated commencing February 2008.

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

|                    | Year Ended December 31,
|------------------- | -----------------------
|
|
|
|
|Europe              |                        
|United States       |                        
|Asia                |                        
|Israel              |                        
|Others (1)          |                        
|                    |                        
|Total revenues, net |                        
|                    |                        

(1) Most
of this increase is attributed to the sales of our Mexican subsidiaries           which
are consolidated commencing February 2008.

# 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 subcontractor 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.

# Gross Profit

Our
gross profit margin was approximately 55%, 54% and 54% for the years ended December 31,
2006, 2007 and 2008, respectively. Although the mixture of the product we sold was
different compared to prior years we have been able to maintain our margins throughout
this period. Our gross margin is affected, among other things, by the mixture of products
sold, by production efficiency, by our penetration efforts to new markets and by currency
fluctuations.

# 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. We expense all our research and development costs as
incurred. As we expand our operations and the development of new products and technologies, we expect
our research and development expenditures to increase in absolute dollar terms.

# 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.

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In
2008 we continued our increased marketing efforts in areas where we established or
purchased a new marketing platform in the past several years, such as in France, the
United Kingdom, Turkey and Mexico. The increase in our selling and marketing expenses
during 2008 was caused mainly as a result of the increase in revenues. As a percentage of
revenues, our selling and marketing expenses decreased from 30.4% for the year ended
December 31, 2007 to 30.2% for the year ended December 31, 2008.

As
we expand our operations, we expect our selling and marketing expenses to remain at
approximately the same level as a percentage of revenues.

# General and
Administrative

Our
general and administrative expenses consist primarily of salaries and other
personnel-related expenses for executive officers, accounting and administrative
personnel, bad debts and doubtful accounts, professional fees, office expenses and other
general corporate expenses. The increase in our general and administrative expenses was
attributable to the increase in our management personnel worldwide as part of our global
expansion of operation. We expect our general and administrative expenses to remain at
approximately the same level as a percentage of our revenues.

# Financial 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 and gains or loses
from derivatives.

# 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. Our
effective tax rate may vary from period to period based on changes in estimated taxable
income or loss, currency fluctuation, 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.

# Equity in Gains (Losses)
of Affiliates, Net

Equity
in gains of affiliates is shown in our consolidated financial statements primarily to
reflect our holdings in Shalens and CIO (until February 20, 2008, the date on which we
acquired control in CIO and Shalens) SOT Optispeed Laboratory (PTY) Ltd. as of December
31, 2008, and our holdings in Shamir Israel (until August 15, 2007, the date on which we
purchased the remaining 50% interest in Shamir Israel), Shalens, CIO and SOT as of
December 31, 2007.

# Minority Interests in
Losses of Subsidiaries

Minority
interests are reflected in our consolidated financial statements in order to reflect our
non-wholly owned subsidiaries in Shalens and CIO (from February 20, 2008, the date on
which we acquired control of 51% in CIO and Shalens), Spherical Optics (Pty) Ltd. (which
we have a 49% minority holding) and Shamir GMBH (until July 1, 2008, the date on which we
purchased the remaining 49% interest in Shamir GMBH), and the minority interest in Shamir
Insight (until July 2007, the date on which we purchased the remaining 10% interest in
Shamir Insight).

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# Operating Results

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

|                                            | Year Ended December 31,
|------------------------------------------- | -----------------------
|
|
|
|
|Revenues, net                               |                        
|Cost of revenues                            |                        
|                                            |                        
|Gross profit                                |                        
|Operating expenses:                         |                        
|Research and development                    |                        
|Selling and marketing                       |                        
|General and administrative                  |                        
|                                            |                        
|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 gains (losses) of affiliates, net |                        
|Minority interest in losses of subsidiaries |                        
|                                            |                        
|Net income                                  |                        
|                                            |                        

Year Ended December 31,
2008 Compared To Year Ended December 31, 2007

Revenues,
Net. Total revenues were $140.3 million for the year ended December 31, 2008, an
increase of $19.9 million or 16.5% compared to total revenues of $120.4 million for the
year ended December 31, 2007. The increase was primarily attributable to the increase of
sales of lenses to the rest of the world and to other third-party manufacturers. The sale
of lenses to the rest of the world and to other third-party manufacturers in 2008
increased by $14.0 million compared to 2007, mainly due to the sales of our newly
consolidated operation in Mexico. Increased demand in the United States through Shamir
Insight resulted in $3.3 million increase of sales and our European subsidiaries that
contributed approximately $4.0 million in sales growth mostly attributed to currency
fluctuation. Revenues generated from services to third-party manufacturers, including
design services, mold production and royalties, decreased by $1.4 million between these
periods.

Cost
of Revenues. Cost of revenues was $64.4 million for the year ended December 31, 2008,
an increase of $8.6 million or 15.3% compared to cost of revenues of $55.9 million for the
year ended December 31, 2007. 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 slightly decreased from 46.4% for 2007 to 45.9% for 2008.

Research
and Development. Research and development costs were $3.4 million for the year ended
December 31, 2008, an increase of $0.8 million or 31.4% compared to research and
development costs of $2.6 million for the year ended December 31, 2007, mainly due to the
increase in manpower and the appreciation of the NIS versus the U.S. dollar.

Selling
and Marketing. Selling and marketing expenses were $42.4 million for the year ended
December 31, 2008, an increase of $5.8 million or 15.9% compared to selling and marketing
expenses of $36.6 million for the year ended December 31, 2007. Selling and marketing
expenses increased primarily due to the increase in sales efforts and the Euro versus
dollar exchange rate fluctuation. As a percentage of revenues, sales and marketing
expenses slightly decreased from 30.3% for 2007 to 30.2% for 2008.

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General
and Administrative. General and administrative expenses were $16.8 million for the
year ended December 31, 2008, an increase of $3.3 million compared to general and
administrative expenses of $13.5 million for the year ended December 31, 2008. As a
percentage of revenues, general and administrative expenses increased from 11.3% for 2007
to 12.0% for 2008. The increase in the general and administrative expenses in U.S. dollar
terms in attributed mainly to the general and administrative expenses of our newly
consolidated activity in Mexico, compensation to our former chief executive officer , and
the Euro versus U.S. dollar and NIS versus U.S. dollar exchange rates fluctuations.

Financial
Expenses and other, Net. Net financial expenses and other was $2.1 million for the
year ended December 31, 2008, an increase of $1.9 compared to Net financial expenses and
other of $0.2 million for the year ended December 31, 2007. This was primarily due to the
fact that our financial income from cash and cash equivalents and short term investments
decreased while the financial expenses on our borrowings increased due to the global
credit crisis and from foreign exchange translation expenses.

Taxes
on Income. Taxes on income were $2.2 million for the year ended December 31, 2008, a
decrease of $2.8 million compared to taxes on income of $5.0 million for the year ended
December 31, 2007. Taxes on income decreased as a percentage of revenues from 4.2% for
2007 to 1.6% for 2008. The effective tax rate for 2008 was 19.7% compared to 43.0% for the
fiscal year 2007. This decrease was mainly attributable to re-measuring in 2008 our
taxable income in Israel for the year 2007 in NIS instead of in U.S. dollar and the
valuation allowance on the deferred tax assets related to our European subsidiaries that
we made in 2007.

Equity
in Gains of Affiliates, Net. Equity in gains of affiliates, net remain constant at
approximately $0.04 million for the year ended December 31, 2008 and 2007. These gains
were related to our affiliates, Shamir Israel (until August 15, 2007, from which time we
held a 100% interest), SOT, CIO and Shalens (until February 20, 2008, from which time we
held a 51% interest), and Optispeed Laboratory (PTY) Ltd.

Minority
Interests in Losses of Subsidiaries. Minority interests in losses were $0.02 million
for the year ended December 31, 2008, a decrease of $1.49 million compared to minority
interests in losses of $1.5 million for the year ended December 31, 2007, this decrease
attributed to our purchase of the minority share in Shamir GMBH on July 1, 2008.

Year Ended December 31,
2007 Compared To Year Ended December 31, 2006

Revenues,
Net. Total revenues were $120.4 million for the year ended December 31, 2007, an
increase of $23.1 million or 23.8% compared to total revenues of $97.3 million for the
year ended December 31, 2006. The increase was primarily attributable to the increase of
sales in Europe through our European subsidiaries and the sales of lenses to the rest of
the world and to other third-party manufacturers. Increased demand in the United States
through Shamir Insight resulted in $1.0 million increase of sales, while increased
marketing activities of European subsidiaries contributed approximately $14.6 million in
sales growth. The sale of lenses to the rest of the world and to other third-party
manufacturers in 2007 increased by $8.0 million compared to 2006. Revenues generated from
services to third-party manufacturers, including design services, mold production and
royalties, decreased by $0.4 million between these periods.

Cost
of Revenues. Cost of revenues was $55.9 million for the year ended December 31, 2007,
an increase of $11.9 million or 26.8% compared to cost of revenues of $44.0 million for
the year ended December 31, 2006. 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 45.3% for 2006 to 46.4% for 2007 mainly due to the devaluation of
the U.S. dollar versus the NIS and Euro.

Research
and Development. Research and development costs were $2.6 million for the year ended
December 31, 2007, an increase of $0.2 million or 8.1% compared to research and
development costs of $2.4 million for the year ended December 31, 2006.

Selling
and Marketing. Selling and marketing expenses were $36.6 million for the year ended
December 31, 2007, an increase of $3.8 million or 11.4% compared to selling and marketing
expenses of $32.8 million for the year ended December 31, 2006. Selling and marketing
expenses increased primarily due to the increase in sales efforts and the Euro versus
dollar exchange rate fluctuation. As a percentage of revenues, sales and marketing
expenses decreased from 33.7% for 2006 to 30.3% for 2007.

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General
and Administrative. General and administrative expenses were $13.5 million for the
year ended December 31, 2007, an increase of $2.5 million compared to general and
administrative expenses of $11.0 million for the year ended December 31, 2006. As a
percentage of revenues, general and administrative expenses remained constant at
approximately 11.3% for 2006 and 2007. The increase in the general and administrative
expenses in U.S. dollar terms in attributed to increases in management personnel
worldwide, an increase in the doubtful accounts provisions and the Euro versus U.S. dollar
and NIS versus U.S. dollar exchange rates fluctuations.

Financial
Expenses and other, Net. Net financial expenses and other remain constant at $0.2
million for the year ended December 31, 2007 and 2006. This was primarily due to the fact
that the increase in the expenses on loans was offset by income from derivatives and
foreign exchange translation.

Taxes
on Income. Taxes on income were $5.0 million for the year ended December 31, 2007, an
increase of $2.8 million compared to taxes on income of $2.2 million for the year ended
December 31, 2006. Taxes on income increased as a percentage of revenues from 2.2% for
2006 to 4.2% for 2007. The effective tax rate for 2007 was 43.0% compared to 31.5% for the
fiscal year 2006. This increase was attributable to an increase in the valuation allowance
on the deferred tax assets related to our European subsidiaries.

Equity
in Gains (Losses) of Affiliates, Net. Equity in gains of affiliates, net was $0.04
million for the year ended December 31, 2007, an increase of $0.29 compared to equity in
losses of affiliates, net of $0.25 million for the year ended December 31, 2006. These
gains were related to our affiliates, Shamir Israel (until August 15, 2007, from which
time we held a 100% interest), SOT, CIO and Shalens.

Minority
Interests in Losses of Subsidiaries. Minority interests in losses were $1.5 million
for the year ended December 31, 2007, a decrease of $0.5 million compared to minority
interests in losses of $2.0 million for the year ended December 31, 2006. This decrease of
minority interest in losses was primarily attributable to the decrease in losses of our
European subsidiaries.

# 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 and returns, 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 collectability 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).

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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. During the fiscal years 2006, 2007 and
2008, no impairment losses were identified in accordance SFAS No. 144.

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.

Our
effective tax rate may vary from period to period based on changes in estimated taxable
income or loss, currency fluctuations, changes to the valuation allowance, changes to
state or foreign tax laws, future expansion into geographic areas with varying country,
state and local income tax rates, deductibility of certain costs and expenses by
jurisdiction and as a result of acquisitions, divestitures and reorganizations.

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

On
January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 contains a two-step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is
to evaluate the tax position taken or expected to be taken in a tax return by determining
if the weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit, including
resolution of any related appeals or litigation processes. The second step is to measure
the tax benefit as the largest amount that is more than 50% likely to be realized upon
ultimate settlement.

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As
a result of the implementation of FIN No. 48, we recognized a $0.5 million increase in
liability for unrecognized tax benefits, which was accounted for as a decrease to the
January 1, 2007 balance of retained earnings.

Goodwill

Under
Statement of Financial Accounting Standard No.142, Goodwill and Other Intangible
Assets (SFAS No, 142), goodwill is not amortized. SFAS No.142 requires
goodwill to be tested for impairment at least annually or between annual tests in certain
circumstances, and written down when impaired. SFAS No. 142 prescribes a two-phase process
for impairment testing of goodwill. 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.

We
compare the fair value of our single reporting unit as defined under SFAS No. 142, to its
carrying value. Fair value is determined using our market capitalization. We perform the
impairment tests during the fourth fiscal quarter of each year. In addition, in accordance
with the provisions of SFAS No. 142, as a result of the global credit crisis, we performed
an additional impairment test as of December 31, 2008. During 2008, 2007 and 2006, no
impairment losses were identified.

Valuation of investment
in marketable securities

Fair
values of marketable securities are estimated using quoted market prices. As of December
31, 2008, we had no investments in illiquid markets. Based on our intent with respect to a
particular investment at the time of investment, we are generally required to classify our
investments into one of three investment categories under GAAP: (i) trading; (ii) held to
maturity; or (iii) available for sale. The classification of the investment may affect our
reported results. We classify the investments as available for sale. Available for sale
investments are carried at fair value. Changes in the fair value of investments classified
as available for sale are not recognized to income during the period, but rather are
recognized as a separate component of equity until realized. We regularly review our
investments for factors that may indicate that a decline in the fair value of an
investment below its cost or amortized cost is other than temporary. Some factors
considered in evaluating whether or not a decline in fair value is other than temporary
include:

| |        
Our
ability and intent to retain the investment for a period of time sufficient to allow for
a recovery in value;
| | --------------------------------------------------------------------------------------------------------------------------

| |        
The
duration and extent to which the fair value has been less than cost; and
| | -------------------------------------------------------------------------------------

| |        
The
financial condition and prospects of the issuer.
| | -------------------------------------------------------------

Such
reviews are inherently uncertain in that the value of the investment may not fully recover
or may decline further in future periods resulting in realized losses. During 2008, 2007
and 2006 no impairment losses were identified.

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Contingencies

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

# Recent Accounting
Pronouncements

Impact of recently issued
accounting standards

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non controlling interest in the
acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after
December 15, 2008. Earlier adoption is prohibited. We believe that the adoption of
SFAS 141R could have an impact on our consolidated financial statements; however, the
impact would depend on the nature, terms and magnitude of acquisitions it consummates in
the future.

In
December 2007, the FASB issued SFAS 160 (SFAS No. 160), Noncontrolling
Interests in Consolidated Financial Statements. SFAS 160 amends Accounting Research
Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling interest. It
also requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the noncontrolling
interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008. The adoption of SFAS 160 is not expected to have a material
effect on accounting for Shamirs current subsidiaries.

In
February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2,
Effective Date of FASB Statement No. 157 (FSP 157-2), to delay the
effective date of FASB Statement 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, excluding those that are recognized or disclosed in financial
statements at fair value on a recurring basis (that is, at least annually).  For
purposes of applying the FSP 157-2, nonfinancial assets and nonfinancial liabilities
include all assets and liabilities other than those meeting the definition of a financial
asset or a financial liability in FASB Statement 159.  FSP 157-2 defers the effective
date of Statement 157 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of this FSP 157-2. We do not
expect the adoption of FSP 157-2 to have a material impact on its financial position,
results of operations or cash flows.

In
April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December
15, 2008. We do not expect the adoption of FSP 142-3 will have a material impact on the
Companys financial position, results of operations or cash flows.

43

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In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. It is effective 60 days following the
SECs approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. We are currently evaluating the impact of SFAS No. 162 on its
financial statements, and the adoption of this statement is not expected to have a
material effect on the Companys financial statements.

# 5.B LIQUIDITY AND
CAPITAL RESOURCES

From
the commencement of our business through December 31, 2008, 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, 2008, we had working capital of $47.8 million, cash and cash equivalents
and short term investments of $25.5 million and unused lines of credit of approximately
$4.9 million.

The
following table sets forth elements of our cash flows for the periods indicated, in
thousands of U.S. 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
will finance acquisitions and purchases of significant fixed assets through loans, capital
leases and working capital. 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 our
working capital. While we cannot predict the outcome of any legal disputes in which we may
be involved or estimate the amounts of damages we may be required to pay, we do not expect
that our short or long-term liquidity or our results of operations will be materially
impacted by any current legal proceedings (see Item 8. Financial
InformationLegal Proceedings).

Our
operating activities provided cash of $11.7 million and $16.6 million for the years ended
December 31, 2007, and 2008, respectively. For the year ended December 31, 2006, our
operating activities used cash of $1.0 million. The change in net cash provided by
operating activities reflects the increase in profitability due to growth in sales and the
change in our working capital.

Our
investing activities used cash of $14.6 million, $11.0 million and $1.1 million for the
years ended December 31, 2006, 2007 and 2008, respectively. The 2008 figures include $7.0
million of proceeds from the sale of short term investments, net. The 2007 figures include
$2.5 million of short term investments, net. 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 and loans given to affiliates, such
as the acquisition of CIO, the acquisition of SOT and the shareholder loans we have
granted it, the purchase of fixed assets for the new polycarbonate factory and laboratory
of SSOP, and the expansion of our production facility in Portugal.

44

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Our
financing activities used cash of $5.4 million and $15.7 million for the years ended
December 31, 2007 and 2008, respectively. For the year ended December 31, 2006, our
financing activities provided cash of $10.9 million. In 2008, we used the cash primarily
for loans repayment in the net amount of $11.7 million and dividend in the amount of $4.0
million.

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 our subsidiary in Turkey, France and the United Kingdom, and for the
expansion of the production facility in Portugal due to the increase of our European
activities.

In
2007, we received long-term loans of $3.1 million for financing the expansion of our
production facility in Portugal.

In
2008, we received long-term loans of $2.9 million for financing the expansion of our
production facility in Portugal and finance of our operations through our subsidiary in
France.

45

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# Borrowings

|                                       | Weighted
Average
Interest
Rate | December
31,2008 (U.S.
dollar in
thousands)
|-------------------------------------- | ------------------------------ | -------------------------------------------
|
|
|
|
|Short-term bank credit and loans       |                                |                                            
|Mainly denominated in Euro             |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|Minority shareholders in subsidiaries: |                                |                                            
|Mainly denominated in Mexican Peso     |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|Long-term loans:                       |                                |                                            
|Dollars                                |                                |                                            
|Euro                                   |                                |                                            
|NIS                                    |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|                                       |                                |                                            
|Total bank credit and loans            |                                |                                            
|                                       |                                |                                            

As
of December 31, 2008, we had aggregate short-term bank credit, short-term loans and
long-term loans of $3.8 million, $7.8 million and $17.7 million, respectively ($1.6, $14.3
and $22.8, respectively, in 2007). As of December 31, 2008 and 2007, we had aggregate
capital leases of $5.9 million and $6.7 million, respectively. These borrowings are
divided between our subsidiaries and us as follows: $33.2 million are held by European
subsidiaries, $0.4 million are held by Shamir, and $0.5 million from other subsidiaries.
In addition, there are $1.1 million in loans from minority shareholders. The decrease in
borrowings is attributed to the loans repayment mainly in our European subsidiaries. The
change in the exchange rate of the Euro versus the U.S. dollar was reflected in a decrease
of our outstanding bank credit and loans as of December 31, 2008, compared to December 31,
2007.

# 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.

46

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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 ended December 31, 2008, 2007, and 2006 was $3.4
million, $2.6 million and $2.4 million, respectively.

# 5.D TREND INFORMATION

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

# 5.E OFF- BALANCE SHEET
ARRANGEMENTS

None

# 5.F CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS

The
following table summarizes our contractual and commercial obligations and commitments as
of December 31, 2008, 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)                          |                
|Tax reserve related to FIN 48 (3)                                             |                
|Other long-term liabilities (4)                                               |                
|                                                                              |                
|Total contractual obligations                                                 |                
|                                                                              |                

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

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

| | (3) | See
note 15 in our attached financial statements.
| | --- | -------------------------------------------------

| | (4) | Mainly
related to liabilities for long-term payments for an acquisition and           intangible
assets.
| | --- | --------------------------------------------------------------------------------------------------------

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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                                 
|----------------------- | --- | --------------------------------------------------------------
|
|
|
|
|Eyal Hayardeny(6)       | 39  | President and Chief Executive Officer                         
|Amos Netzer(6)          | 53  | President and Chief Executive Officer (effective July 1, 2009)
|Dan Katzman             | 54  | Chief Technology Officer and Vice President of R&D            
|Dagan Avishai (1) (2)   | 49  | Vice President of Marketing                                   
|Yagen Moshe             | 39  | Chief Financial Officer                                       
|Rami Ben-Ze'ev (1) (2)  | 59  | Vice President Business Management                            
|Noam Shamir             | 47  | Vice President of Global Operations                           
|Ra'anan Naftalovich     | 44  | Chief Executive Officer of Shamir Insight, Inc.               
|Ron Sonnenschein        | 59  | Managing Director of our European operations                  
|Uzi Tzur (1) (4)        | 69  | Director and Chairman of the Board                            
|Giora Ben-Ze'ev (1) (2) | 66  | Director                                                      
|Efrat Cohen (2)         | 41  | Director                                                      
|Ami Samuels (5)         | 50  | Director                                                      
|Giora Yanay (5)         | 71  | Director                                                      
|Israel Oz (3)           | 53  | Director                                                      

---

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

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

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

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

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

|(6) | On
April 30, 2009, our board of directors resolved that Mr. Netzer shall replace
               Mr. Hayardeny who has resigned from his position as our President and
Chief                Executive Officer as of July 1, 2009.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Eyal
Hayardeny. Mr. Hayardeny was appointed as our President and Chief Executive Officer
effective as of April 2, 2008. Mr. Hayardeny joined our company as an Executive Vice
President and Vice President of Business Development in 2005. From 1994 to 1998, he worked
at Somekh Chaikins (KPMG) 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 Bar-Ilan University. Mr.
Hayardeny resigned from his position as our President and Chief Executive Officer as of
July 1, 2009.

Amos
Netzer, Mr. Netzer serves as the chief executive officer of Spirit Economic Consultants
Ltd. He served as an external director of our board of directors until April 26, 2007.
Since July 2000 and until September 2007 he served as the managing director of Palram
Industries Ltd., a public company traded on the Tel Aviv Stock Exchange. From 1998 until
2000 he was the managing director of SMS, a private company engaged in the production and
distribution of plastic products to world markets. Between 1993 and 1997, he was president
of Suntuf, Inc., a U.S.-based and responsible for the establishment of the North and
south American marketing and distribution network of Palram-Paltough Ltd. He serves
as a board member of Palram Industry Ltd., SZP Ltd., Al Baad Ltd., and as the chairman of
the board of directors of Bio Bee Ltd., and Polyrit Ltd. He holds a B.Sc. degree in
industry and administrative engineering from the Technion Institute in Haifa and an MS
degree in public policy from Tel Aviv University. Mr. Netzer was appointed by our board of
directors to serve as our President and Chief Executive Officer starting July 1, 2009.

48

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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.

Dagan
Avishai. Mr. Avishai has been our 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 Ernst &
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 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 director at Shalag Industries, Ltd. and a member of the management board of
Kibbutz Shamir. He holds a BA degree in economics from the Hebrew University of Jerusalem
and an Executive MBA from Tel Aviv University.

Noam
Shamir. Mr. Shamir joined our Company in 2008 and as of September 2008 has served as
Vice President of Global Operations. Previously, he served as Vice President Supply Chain
at Taro Pharmaceuticals. From 2001 to 2004 he served as Chief Information Officer at
Cyoptics, Inc., and from 1991 to 2001 he served as Plant Manager and Production Planning
and Control Manager at Delta Galail Industry. He holds a B.Sc in Industrial
Engineering from the Israel Institute of Technology.

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
Sonnenschein. Mr. Sonnenschein has been the Chief Executive Officer of Shamir Optic GmbH
since 2002 and since than he is the manager of our European operations. Prior to this
position he served as the Executive Vice President of Altra. Prior to its acquisition by
us Mr. Sonnenschein served as the President and Chief Executive Officer of Eyal Optical
Industries (1995) Ltd. from 1982 to 1989. Previously, he served as the treasurer of
Kibbutz Eyal between the years 1975 and 1979. Mr. Sonnenschein 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.

Giora
Ben-Zeev. Mr. Ben-Zeev has been a member of our board of directors since its
original establishment in 1997. Mr. Ben-Zeev was our President and Chief Executive
Officer from 1994 to April 2, 2008. Mr. Ben-Zeev is a member of the management board
of Kibbutz Shamir. He holds a BSc degree from the Technion Israel Institute of Technology
in industrial and management engineering.

49

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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. She is a director at Shalag
Industries, Ltd. and a member of the management board of Kibbutz Shamir. Mrs. Cohen holds
a BA degree in economics and management from the Ruppin Academic Center.

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 MA degree in
Management from Yale University.

Giora
Yanai. Mr. Yanai has been elected to serve as a member of our board of directors in June
2009. He is currently the managing director of Yanai Information Resources Ltd., a
consulting firm providing economic research, strategic and marketing consulting and
M&A services. Between 1994 and 1995 he served as management consultant at Friedman
Turbidy Inc., a New York company engaged in strategic business and management consulting
and finance. Between 1988 and 1992 he served as the economic director of Kibbutz Artzi
Movement, where he managed and negotiated the major debt restructuring agreement with the
Israeli government and major Israeli banks for Kibbutz organizations nationwide, and
designed restructuring plans for dozens of Kibbutz settlements and industries. Between
1981 and 1987 he served as managing director of Mivrag Ltd., the cold forming metal
factory of Kibbutz Ein Hashofet, as well as general manager of Kibbutz Ein Hashofet
between the years 1968-1971 and between 1992 and 1993. From 1977 until 1980 he served as
the representative of the Israel Kibbutz Industry Association in the U.S. From 1972 until
1977 Mr. Yanai served as managing director of Eltam Ltd., a producer of electrical
products, lighting and electronics. Mr. Yanai studied as a visiting scholar and completed
the coursework for an M.B.A. at Columbia Business School and has studied agriculture at
the Hebrew University in Jerusalem.

Israel
Oz. Mr. Oz has been elected to serve as a member of our board of directors in June 2009.
He currently serves as chairman of the board of directors of the Lordan plant in Kfar
Sold, Israel, which is engaged in manufacturing heat transfer equipment, and since 2003
has served as the chairman of the Administration of Kibbutzim Agreement Ltd. From 1996
until 2006, he served as the chairman of the board of directors of the holding company
Neot Mordechai and of the Teva Neot shoe factory and the Palrig Neot plastics factory.
Between 1996 and 2003, he served as a director at Bank Yahav, at Manpower, and at Blue
Square Chain Investments & Properties Ltd. Between 1996 and 2003, he also served as
chairman of the economic committee of Kibbutz Neot Mordechai and of Kibbutz Genosar.
Between 1993 and 1995, he served as chief of staff of the Israeli Minister of Finance,
Abraham Shohat. Between 1987 and 1993, he owned and served as the manager of Tmurot, a
company engaged in organizational consulting. Mr. Oz holds a B.A. in economics and
sociology from the Hebrew University in Jerusalem and has studied business administration
and organizational behavior at the Hebrew University in Jerusalem.

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.

50

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Our
board of directors currently consists of six 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.

As
of June 15, 2009, our majority shareholder, Kibbutz Shamir, holds approximately 59.04% of
our outstanding shares and as a result we are considered to be a controlled
company for the purpose of Nasdaq Listing Rules. Under these rules, a
controlled company is a company of which more than 50% of the voting power for
the election of directors is held by an individual, a group or another company. Under
Nasdaq Listing Rules, a companys board of directors must be comprised of a majority
of independent directors, however, a controlled company is exempt from this requirement.
Currently we do not have a majority of independent directors on our board of directors.

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 C will expire at the next annual meeting of shareholders, which will
take place during the year of 2009, 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 2010, and at each
third succeeding annual meeting thereafter. The term of office of the directors assigned
to class B will expire at the annual meeting of shareholders, which will take place during
the year of 2011, and at each third succeeding annual meeting thereafter. Giora
Ben-Zeev and Israel Oz serve as class A directors, Efrat Cohen serves as class B
director and Uzi Tzur serves as 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 can not 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.

51

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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. 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.

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.

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

6.B COMPENSATION OF
DIRECTORS AND MANAGEMENT

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

At
the annual meeting of shareholders on April 26, 2007, our shareholders resolved that each
of the current and future directors, including the External Directors but excluding our
chairman and our chief executive officer at the time of the resolution, Mr. Giora Ben
Zeev, 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 Special 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 our chief executive officer at the date of the
options grant, Mr. Yair Shamir and Mr. Giora Ben-Zeev, respectively.

On
October 11, 2007, our shareholders approved a proposal to grant to Mr. Uzi Tzur, the
chairman of our board of directors, a monthly salary of $5,500 retroactively as of July 1,
2007. In addition, on December 5, 2007, our shareholders approved the grant of an
additional 51,460 options to Mr. Tzur, following which he holds 75,000 options to purchase
ordinary shares of the Company.

The
aggregate compensation we paid our directors as a group (seven persons), excluding
stock-based compensation, for the year ended December 31, 2008 was $0.16 million. 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, or stock-based compensation.
We have also granted options to purchase our ordinary shares to our directors as part of
their overall compensation. See Share Ownership.

The
aggregate compensation we paid to our officers as a group (eleven persons, including
officers that retire or were appointed during 2008, for the period of their appointment),
excluding stock-based compensation, for the year ended December 31, 2008, 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 $3.1 million, including amounts set aside or accrued to provide for pension,
retirement or similar benefits. This amount also includes the accrued and partially paid
special compensation to our former chief executive officer. 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 Share
Ownership.

As
of June 15, 2009, options granted to our current and former directors and officers to
purchase a total of 1,080,224 of our ordinary shares were outstanding, at exercise prices
ranging from $2.46 to $13.76 with a weighted average exercise price of $8.39 per share.
See  Share Ownership for a description of the options granted to our
officers.

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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, Giora Yanai and Israel Oz. Our board of
directors has determined that Giora Yanai 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.

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 Israel Oz as chairman, Giora Yanai, 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 Giora Yanai as
chairman, Ami Samuels and Israel Oz. The composition and functions of the nominating and
governance committee meet the requirements of the NASDAQ Global Market rules.

Internal Auditor

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

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6.D EMPLOYEES

As
of June 15, 2009, our worldwide workforce consists of 1,188 people, which includes
approximately 42 employees who provide services to us through our working service
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 as of June 15 | 2007 | 2008 | 2009
| | ------------------------------------ | ---- | ---- | ----
|
|
|
|
| | Research and development             |      |      |     
| | Marketing and sales                  |      |      |     
| | Management and administration        |      |      |     
| | Manufacturing and warehouse          |      |      |     
| |                                      |      |      |     
| | Total                                |      |      |     
| |                                      |      |      |     
| |                                      |      |     
| | Israel                               |      |      |     
| | United States                        |      |      |     
| | Europe                               |      |      |     
| |                                      |      |     
| | Mexico                               |      |      |     
| | 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.

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, Shamir Israel, Shamir Or and Shamir.

The
Israeli government, as part of a program to encourage the employment in the peripheral
parts of Israel, grant certain subsidies to companies to help finance salary expenses of
new employees for a period of 5 years. Our subsidiary SSOP is part of this program. In
order to secure this subsidy, SSOP granted the State of Israel a bank guarantee. If SSOP
fails to comply with certain conditions set by the government in this program it may have
to return part or all of the subsidy it received.

6.E SHARE OWNERSHIP

Our
executive officers and other certain employees, other than directors, hold options to
purchase 1,380,416 of our ordinary shares.

At
our special general meetings on July 18, 2005, and 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 former chief executive officer, Giora Ben-Zeev).
In addition, at our special general meeting on December 5, 2007, our shareholders approved
the issuance of 51,460 options to Mr. Uzi Tzur, the chairman of our board of directors.
For a description of the options held by our directors, please see
Compensation of Directors and Management.

55

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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 former 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, Amir Hai, and to our vice president of marketing,
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, the chairman of our
board of directors at the date of the grant (see Compensation of Directors and
Management). On August 21, 2005, the boards compensation committee approved an
additional grant to Amir Hai, our former chief financial officer, of options to purchase
33,487 shares at the exercise price of $11.55 per share. The options granted to Messrs.
Shamir, Ben-Zeev and Hai have been terminated unexercised following their
resignations from their positions at Shamir and pursuant to the terms of our 2005 General
Share and Incentive Plan as detailed below.

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,
we granted 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. In
addition, 100,000 options were granted to Eyal Hayardeny at an exercise price of $9.97 per
share. On August 14, 2006 we granted Eyal Hayardeny 47,000 options with an exercise price
of $8.86 per share. On August 21, 2007, we granted Eyal Hayardeny 13,000 options with an
exercise price of $9.99 per share. On September 23, 2007, we granted Eyal Hayardeny 80,000
options with an exercise price of $12.29 per share. On March 10, 2008, we granted Eyal
Hayardeny 61,000 options with an exercise price of $7.1 per share. On June 17, 2009, our
audit committee and board of directors have approved an amendment to the terms of all of
the options granted to Mr. Hayardeny following his resignation from his position in the
Company. As a result of such amendment, as of July 1, 2009, Mr. Hayardeny shall hold
225,623 fully vested options with different exercise prices, as detailed above, all of
which shall be terminated on March 31, 2010, if not exercised.

On
June 30, 2006, we granted Yagen Moshe, our chief financial officer, 50,000 options at an
exercise price of $9.00 per share. In addition, on August 21, 2007, we granted Mr. Moshe
50,000 options with an exercise price of $9.99 per share.

On
April 30, 2007, we granted 35,000 options with an exercise price of $9.82 per share each
to Youval and Zohar Katzman, employees of SSOP, in place of the options that had been
granted to them as consultants on May 15, 2006, which were canceled.

On
August 21, 2007, we granted Rami Ben-Zeev, our vice president of business
management, and Noam Bachar, our former vice president of Business and Development, 23,540
and 50,000 options each, respectively, with an exercise price of $9.99 per share. Mr.
Bachar resigned from his position on March 18, 2009, and the options granted to him shall
be terminated pursuant to the terms of our 2005 General Share and Incentive Plan.

At
our special general meeting on December 5, 2007, our shareholders approved the issuance of
51,460 options to Mr. Uzi Tzur, the chairman of our board of directors, with an exercise
price of $8.59 per share.

On
November 30, 2008, our board of directors granted options to purchase 256,000 of our
shares to certain of our executive officers and other employees all with an exercise price
of $5.00 per share.

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 February 1, 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. On July 31, 2008 our shareholders approved an amendment to our 2005 General Share
and Incentive Plan to provide that in the event we distribute a cash dividend and the
record date for such distribution is subsequent to the date of grant of an award in the
form of an option to purchase shares, but prior to its exercise or expiration, the
exercise price of each such award will be reduced by the dividend amount per share.
Further, at the above mentioned meeting, our shareholders resolved to adjust the exercise
price of the outstanding options, including outstanding options previously granted to
directors and external directors in the Company, by reducing the exercise price by $0.243,
the dividend per share declared by the Company in January 2008.

56

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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, we 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. These options were
exercised in July 2007. 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.

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. On November 30, 2008, we amended the terms of
such options so that 105,000 fully vested options shall remain exercisable until December
31, 2010 at an exercise price of $9.96; and 15,480 vested options were terminated on
December 31, 2008.

57

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ITEM 7. MAJOR SHAREHOLDERS AND
RELATED PARTY TRANSACTIONS

7.A MAJOR SHAREHOLDERS

The
following table and footnotes set forth information, as of June 15, 2009, 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, 2009.

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 16,423,740
ordinary shares outstanding as of June 15, 2009, 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) | Based
on Amendment No. 1 to Schedule 13G filed on February 13, 2008 and other
               information provided to us by Kibbutz Shamir, 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, Nir Shmueli, Geva Aharon,                Eyal Meron, Zeev
Markman, Ilan Pickman, Yossi Michaeli, Maya Segal and                Omry Rotem. The
number of ordinary shares held by Kibbutz Shamir excludes                additional
ordinary shares of Shamir that Kibbutz Shamir, through Shamir Optica,                may
be deemed to beneficially hold as a result of the shareholders agreement
               entered into with certain other shareholders of Shamir relating to, among
other                things, the voting of nominees to our board of directors, as further
described                in Related Party TransactionsShareholders Agreement. Kibbutz
               Shamir and Shamir Optica disclaim beneficial ownership in the shares owned
by                the other parties to the shareholders agreement.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Based
on information provided to us by the chief financial officer of FIBI 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 Kobi Sitt. The                members of the board of
directors of FIBI are Zadik Bino, Gil Bino, Garry Stock                and Kobi Sitt. 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Based
on Amendment No. 1 to Schedule 13G filed on April 2, 2007, the number of ordinary shares
held by FIBI excludes additional ordinary shares of Shamir that FIBI and FIBI Holdings
Ltd. each may be deemed to beneficially hold as a result of the shareholders agreement
entered into by FIBI with certain other shareholders of Shamir relating to, among other
things, the voting of nominees to our board of directors, as further described in Related
Party TransactionsShareholders Agreement. FIBI and FIBI Holdings Ltd. each
disclaim beneficial ownership in the shares owned by the other parties to the
shareholders agreement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Consists
of 107,226 ordinary shares and currently exercisable options to acquire
               200,591 ordinary 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 Amendment No. 3 to Schedule 13G filed
               with the SEC by Royce & Associates, LLC on January 30, 2009.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

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

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 approximately 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 is the majority shareholder of 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.

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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. 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. Two of our board members, Giora Ben-Zeev and
Efrat Cohen, and two of our companys executive officers, Dagan Avishai and Rami
Ben-Zeev, are also members of Kibbutz Shamir and of the management board of Kibbutz
Shamir. Ms. Efrat Cohen is a member of the management board of Kibbutz Shamir but not a
member of Kibbutz Shamir itself. As of June 15, 2009, approximately 42 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 arms
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 Service Agreement
with Kibbutz Shamir

We
entered into a working service agreement with Kibbutz Shamir in February 2005. On July 19,
2007, we entered into a new working service agreement with Kibbutz Shamir which replaces
the agreement from February 2005. The terms of the new working service agreement are
substantially similar to the terms of the agreement from February 2005. Under the working
service 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.
Pursuant to the agreement, our chief executive officer at the time, Giora Ben-Zeev,
and our executive vice president at the time, Dagan Avishai, each entered into individual
employment agreements with the Company and are not part of the working service agreement.

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. We may, for reasonable
cause, refuse to accept workers referred to us by Kibbutz Shamir or demand the replacement
of existing workers. The agreement sets 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. In addition, 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 service agreement, the consideration to be paid by the Company. 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
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
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
2008, we paid a total of approximately $1.3 million to Kibbutz Shamir under the working
service agreement.

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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 (1995) Ltd. to employ directly (i.e. not through the working service
agreement) local members of Kibbutz Shamir.

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
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.

On
July 19, 2007, we entered into an additional arrangement with Kibbutz Shamir. Under the
additional 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.

In
2008, we paid a total of approximately $0.6 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.

Lease and Sublease
Agreements with Kibbutz Shamir

Our
principal offices, manufacturing and research and development facilities are located on
the premises of Kibbutz Shamir and include a building of approximately 4,786 square
meters, and a yard of approximately 2,287 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.

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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 3,646 square meters and a yard of approximately 2,287 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.

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.

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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 2008, we paid a total of approximately $0.7 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 special 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 rented 120 square meters for SSOP. This memorandum of understanding
provided for the same rental amounts as the sublease agreement with Kibbutz Shamir, as
described above. On December 15, 2007, we terminated the memorandum of understanding with
Shalag Industries Ltd.

On
November 1, 2007, in lieu of the lease with Shalag, we and Kibbutz Shamir entered into a
lease agreement pursuant to which we lease a newly constructed facility in the Kibbutz for
SSOP until November 30, 2023. We are 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 facility is included in the long-term lease between Kibbutz Shamir and the 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 agreements, which could affect the terms of the lease, and may
trigger the termination of the lease. Under the lease, Kibbutz Shamir is responsible for
any expense resulting from actions of the ILA. The annual rental fees pursuant to the
lease are payable quarterly, in an amount equal to 10% of the actual construction cost of
the facility, 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 current annual
lease payment to Kibbutz Shamir for the use of this facility is approximately $460,000.

Loan Agreement 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 was repaid by December 31, 2008, through
deductions of the rental fees we pay to Kibbutz Shamir.

At
our special general meeting of shareholders on 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 grounds, for
our use. At our special general meeting of shareholders on March 8, 2007, our shareholders
approved the termination of the loan. 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.

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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.

In
addition, the agreement gives FIBI, 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 8.35% 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 1.85% of our shares.

Kibbutz
Eyal holds our shares through Haklaei Hasharon A.C.S. Ltd., an agricultural collective
society 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.

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Relationship with Mr.
Michael Oppenheimer

On
July 1, 2008, we executed an agreement pursuant to which we purchased from Mr. Oppenheimer
his entire holdings in our European operations. Under the terms of the agreement, we will
pay an amount derived from our European subsidiaries consolidated net profit for the
fiscal years ending December 31, 2008, 2009 and 2010, not to exceed the total amount of
Euro 500,000. In addition, we have undertaken to repay the loans received from Mr.
Oppenheimer from time to time in aggregate principal amount of Euro 3.6 million ($5.0
million) as of December 31, 2008. The loans will be repaid in several payments until June
30, 2011.

7.C INTERESTS OF EXPERTS
AND COUNSEL

Not
applicable.

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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
2008, substantially, all of our mold and semi-finished lenses were produced in Israel.
Production of finished lenses took place mostly outside of Israel. Most of our export
sales from Israel abroad are to our subsidiaries. Our export sales from Israel abroad to
external customers totaled approximately $9.7 million, which is 6.9% 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, claims regarding intellectual
property or labor disputes with former employees. We are involved in two disputes
concerning allegations of breach of third parties intellectual property, as
described below.

In
September 2003, we received a notice from a large lens manufacturer regarding a claim of
patent infringement relating to lenses produced using our software. We have denied any
such infringement, and numerous discussions between the companies (and counsel)
have ensued and are ongoing in order to resolve the matter without resorting to
litigation.

In
January 2008, we received a notice from a shareholder of one of our subsidiaries claiming
unlawful use of the subsidiarys intellectual property and unjust enrichment. We have
denied any such infringement, and numerous discussions between the parties (and
counsel) have ensued and are ongoing in order to resolve the matter without resorting to
litigation.

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

Dividend Policy

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. On June 27, 2007, we declared a
dividend of $4.0 million, which was paid in July 2007. On January 14, 2008, we declared a
dividend of $4.0 million, which was paid in February 2008.

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

Our ordinary
shares began trading publicly on March 11, 2005. Prior to that date, there was no public
market for our ordinary shares. 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 11, 2005 through December 31, 2005) |      |    
| | 2006                                                                |      |    
| | 2007                                                                |      |    
| | 2008                                                                |      |    

| | 2007           | High | Low
| | -------------- | ---- | ---
|
|
|
|
| | First Quarter  |      |    
| | Second Quarter |      |    
| | Third Quarter  |      |    
| | Fourth Quarter |      |    

| | 2008           | High | Low
| | -------------- | ---- | ---
|
|
|
|
| | First Quarter  |      |    
| | Second Quarter |      |    
| | Third Quarter  |      |    
| | Fourth Quarter |      |    

| | 2009                                   | High | Low
| | -------------------------------------- | ---- | ---
|
|
|
|
| | First Quarter                          |      |    
| | Second Quarter (through June 15, 2009) |      |    

| | Month                             | High | Low
| | --------------------------------- | ---- | ---
|
|
|
|
| | December 2008                     |      |    
| | January 2009                      |      |    
| | February 2009                     |      |    
| | March 2009                        |      |    
| | April 2009                        |      |    
| | May 2009                          |      |    
| | June 2009 (through June 15, 2009) |      |    

Our
ordinary shares began trading publicly on the Tel-Aviv Stock Exchange on May 2, 2005. 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                                                             |      |    
| | 2007                                                             |      |    
| | 2008                                                             |      |    

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| | 2007           | High | Low
| | -------------- | ---- | ---
|
|
|
|
| | First Quarter  |      |    
| | Second Quarter |      |    
| | Third Quarter  |      |    
| | Fourth Quarter |      |    

| | 2008           | High | Low
| | -------------- | ---- | ---
|
|
|
|
| | First Quarter  |      |    
| | Second Quarter |      |    
| | Third Quarter  |      |    
| | Fourth Quarter |      |    

| | 2009                                   | High | Low
| | -------------------------------------- | ---- | ---
|
|
|
|
| | First Quarter                          |      |    
| | Second Quarter (through June 15, 2009) |      |    

| | Month                             | High | Low
| | --------------------------------- | ---- | ---
|
|
|
|
| | December 2008                     |      |    
| | January 2009                      |      |    
| | February 2009                     |      |    
| | March 2009                        |      |    
| | April 2009                        |      |    
| | May 2009                          |      |    
| | June 2009 (through June 15, 2009) |      |    

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.

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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.

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.

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

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

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

Dividend and Liquidation
Rights

Our
board of directors may, without seeking shareholder approval, declare a dividend to be
paid to the holders of 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.

Tax Law

Israeli
tax law treats some acquisitions, particularly stock-for-stock swaps between an Israeli
company and aforeign 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.

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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 33
(1)/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.

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

Transfer Agent and
Registrar

We
have appointed American Stock Transfer & Trust Company as the transfer agent and
registrar for our 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,
according to which these shareholders, who held a total of 12,711,332 shares prior to the
offering and currently hold a total of 11,371,919 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 had
the right to make one such demand. To out knowledge, Vision Capital LLC does not hold any
of our ordinary shares that are subject to the registration agreement. 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 2011, or with respect to any shareholder, at such a time as that
shareholder either disposes of its shares or will be able to sell all of the registrable
securities it holds without registration and without restrictions in compliance with Rule 144.

10.D EXCHANGE CONTROLS AND OTHER
LIMITATIONS AFFECTING SECURITY HOLDERS

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

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

| |  | 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, which entered
into force on December 30, 2004 (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.

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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 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 received by you 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, 2008, 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.

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.

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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, 2008. 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 certain 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.

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.

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General
Corporate Tax Structure

Israeli
companies are currently subject to tax at the rate of 27% 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, 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%, the
capital gains subject to a tax rate of 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.

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 an Israeli limited
corporation which took place in March 2005.

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 the reduced tax rate period 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 that 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 operations has been granted the status of an Approved
Enterprises under three programs of grants track that are still active. 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 and assuming that more than 25% of the shares of the company are held by
foreign residents, the current benefits will continue until 2008 with respect to the first
approved enterprise, until 2010 with respect to the second approved enterprise program,
and until 2014 with respect to the third approved enterprise program.

A
portion of the operations 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 2008, 2011, 2013,
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.

Dividends that are derived from Approved Enterprise are generally subject to 15% withholding tax rate.
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.

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 Beneficiary Enterprise, such as
provisions generally requiring that at least 25% of the Beneficiary 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.

The
operations 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 forms 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 2008 due to its
accumulated losses. In addition, during the fiscal year 2007, a portion of Eyals
activities have been acting under the status of a Privileged Enterprise under the
amendment to the Investment Law. As stated above, Eyals status as a Privileged
Enterprise is subject to the approval of the ITA.

Shamir
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 and Privileged Enterprise.

Inflationary
Adjustments

In
February 2008, the Israeli legislator adopted an amendment to the Income Tax (Inflationary
Adjustments) Law, 1985, which limits the scope of the law starting in 2008 and thereafter.
Starting in 2008, the results for tax purposes are measured in nominal values, excluding
certain adjustments for changes in the Consumer Price Index carried out in the period up
to December 31, 2007. The amended law includes, inter alia, the elimination of the
inflationary additions and deductions and the additional deduction for depreciation
starting in 2008.

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Dollar
Regulations

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 and its subsidiaries Eyal and SSOP have 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. During 2008, Shamir and Eyal, elected to measure its Israeli
taxable income in NIS rather than in the exchange rate of NIS against the U.S. dollar.
This election is applicable for a four taxable years commencing on January 1, 2007. The
Company was permitted to make such change pursuant to regulations published by the Israeli
Minister of Finance, which provide the conditions for such change. Therefore, the Company
and Eyal re-measured their 2007 taxable income during 2008. In general, a company that
elects to apply these regulations can not change its resolution for a period of three
years following the fiscal year of such election.

Tax
Benefits for Research and Development

The
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.

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

Shamir
and certain of its Israeli subsidiaries currently qualify as Industrial Companies pursuant
to the Industry Encouragement Law. Currently, Shamir files consolidated tax returns
together with SSOP.

Eligibility
for benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any government authority. 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, as defined
for Israeli tax purposes, 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. In calculating capital gain, the Israeli Tax Ordinance distinguishes
between Real Gain and the Inflationary Surplus. The Inflationary
Surplus is the portion of the total capital gain equal to the increase in the relevant
assets value that is attributable to the increase in the Israeli CPI between the
date of the purchase and the date of sale. The Real Gain is the excess of the total
capital gain over Inflationary Surplus. A non-resident that invests in taxable assets with
foreign currency, or any individual that holds securities the price of which is stated in
foreign currency, may elect calculate the amount of inflationary surplus in that foreign
currency.

78

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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 the  Inflationary  Adjustment Law, will be taxed at the corporate tax rate (27%
in 2008), only if such securities were held by such a corporation prior to December 31,2005.

Individual
and corporate shareholder dealing in securities in Israel are taxed at the tax rates
applicable to business income (in 2008  27% tax rate for a corporation and a
marginal tax rate of up to 47% 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.

Dividends

A
distribution of dividend from income attributed to an Approved Enterprise and
Privileged 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.

79

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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.

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 20% 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.

80

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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.

81

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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 Euros but also in the currencies of the
United Kingdom, South Africa, Turkey, Mexico, Israel and other countries as well as other
currencies. Thus, we are exposed to foreign exchange movements. 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 2008 we generated approximately 31.5% of our revenues in
dollars and 48.3% in Euros, and we incurred approximately 18.0% of our operating expenses
in NIS, 32.2% in dollars and 38.6% in Euros.

In
Europe we operate through our European subsidiaries, which has most of its assets and
liabilities 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 subsidiaries operate in Israel and have assets and liabilities mainly in dollars,
as well as some assets and liabilities in Euros and NIS . Commencing in 2008 our new
Mexican subsidiaries have assets and liabilities in Mexican Pesos as well. 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, 2008, we had $22.7 million in monetary current assets and $29.1 million in
monetary current liabilities that are denominated in Euros. Additionally, we had $5.1
million in monetary current assets and $3.9 million in monetary 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. Our
financial instruments are potentially subject to concentrations of credit risk consist
principally of cash and cash equivalents, short-term deposits, marketable securities and
our customers.

The
majority of our cash and cash equivalents and short-term deposits are invested mainly in
U.S. dollar and Euro instruments with major banks in Israel, Germany and the U.S.
Marketable securities include investments in debentures of U.S. treasury, U.S. government
agencies and corporations. Our investment policy provides for a minimum grading of
debentures in which we can invest, thereby reducing credit risk.

While
we may in a small number of instances be exposed to credit risk with respect to our
customers, we perform ongoing credit evaluations of our customers and believe that this
risk is not material.

ITEM 12. DESCRIPTION OF SECURITIES
OTHER THAN EQUITY SECURITIES

Not
applicable

82

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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.

Up
to June 15, 2009, 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 a 51% stake in our South Africa distributor;
| | - | -----------------------------------------------------------------------------------------

| |  | to
pay approximately $12.2 million to establish the new SSOP production facilities;
| | - | -----------------------------------------------------------------------------------

| |  | to
pay approximately $1.0 million in order to establish and expand Shamir Israel's operation;
| | - | ---------------------------------------------------------------------------------------------

83

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| |  | 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 $6.4 million to acquire a 51% stake in each of our Mexican
distributors, including          obligations to shareholders loans;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | to
pay approximately $1.3 million to acquire a 40.4% stake and finance our Thai manufacture
and distributor;
| | - | ------------------------------------------------------------------------------------------------------------

| |  | to
pay approximately $ 1.8 million to purchase the remaining 49% of the holdings in our
European operations;          and
| | - | -------------------------------------------------------------------------------------------------------------------------

| |  | to
pay approximately $ 4.2 million as repayment of long term loans.
| | - | -------------------------------------------------------------------

ITEM 15T. CONTROLS AND PROCEDURES

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

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

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

| |  | provide
reasonable assurance that transactions are recorded as necessary to permit the
preparation of our financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

84

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

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

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

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our
board of directors has determined that Giora Yanai, 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, 2007 and 2008, are set below:

|Audit Fees Shamir  | 2007 | 2008
|------------------ | ---- | ----
|
|
|
|
|Audit fees         |      |     
|Audit-related fees |      |     
|Tax fees           |      |     
|Other fees         |      |     
|                   |      |     
|Total              |      |     
|                   |      |     
|                   |      |     

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

On
July 31, 2008, the annual meeting of our shareholders approved the re-nomination of Kost
Forer Gabbay & Kasierer as our auditors for the period ending at the close of the
next annual general meeting.

85

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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. 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.

ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT

Not
Applicable.

ITEM 16G. CORPORATE GOVERNANCE

There
are no significant ways in which the corporate governance of our company, as a foreign
private issuer, differ from those followed by domestic companies listed on the Nasdaq
Global Market. For more information regarding the structure of our board of directors and
the exemption available to our company as a controlled company, see Item
6.A. Directors, Senior Management  Board of Directors.

86

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PART III

ITEM 17. FINANCIAL STATEMENTS

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

ITEM 18. FINANCIAL STATEMENTS

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, 2007 and
2008, 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, 2007 and 2008                                         | F-3 - F-4 
|Consolidated Statements of Income for the years ended December 31, 2006, 2007 and 2008               | F-5       
|Consolidated Statements of Shareholders' Equity for the years ended December 31, 2006, 2007 and 2008 | F-6       
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008           | F-7 - F-10
|Notes to Consolidated Financial Statements                                                           | F-11- F-46
|                                                                                                     |           

ITEM 19. EXHIBITS

See Exhibit Index.

87

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# SHAMIR OPTICAL
INDUSTRY LTD. 
AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2008

# 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 Shareholders' Equity         | F-6        
|                                                       
|Consolidated Statements of Cash Flows                   | F-7 - F-10 
|                                                       
|Notes to Consolidated Financial Statements              | F-11 - F-46
|                                                        |            



---

---



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Kost Forer Gabbay & Kasierer3 Aminadav St.
Tel-Aviv 67067, IsraelTel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders
and Board of Directors of

# SHAMIR OPTICAL
INDUSTRY LTD. AND ITS SUBSIDIARIES

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

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

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Shamir as of December 31,
2008 and 2007 and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|June 18, 2009    | 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 $ 2,140 and $ 2,066 |             
|at December 31, 2007 and 2008, respectively) *)                                  |             
|Other accounts receivable and prepaid expenses *)                                |             
|Inventory                                                                        |             
|                                                                                 |             
|                                                                                 |             
|Total current assets                                                             |             
|                                                                                 |             
|                                                                                 |             
|LONG-TERM INVESTMENTS:                                                           |             
|Severance pay fund                                                               |             
|Long-term receivables                                                            |             
|Investments in affiliates and others                                             |             
|                                                                                 |             
|                                                                                 |             
|Total long-term investments                                                      |             
|                                                                                 |             
|                                                                                 |             
|PROPERTY, PLANT AND EQUIPMENT, NET                                               |             
|                                                                                 |             
|                                                                                 |             
|OTHER ASSETS                                                                     |             
|                                                                                 |             
|                                                                                 |             
|GOODWILL                                                                         |             
|                                                                                 |             
|                                                                                 |             
|Total assets                                                                     |             
|                                                                                 |             
|                                                                                 |             

|*) | As
for transactions with related parties, see Note 17.
|-- | ------------------------------------------------------

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                                                       |             
|Other long-term liabilities                                                 |             
|Deferred tax liabilities                                                    |             
|                                                                            |             
|                                                                            |             
|Total long-term liabilities                                                 |             
|                                                                            |             
|                                                                            |             
|MINORITY INTERESTS                                                          |             
|                                                                            |             
|                                                                            |             
|COMMITMENTS AND CONTINGENT LIABILITIES                                      |             
|                                                                            |             
|SHAREHOLDERS' EQUITY:                                                       |             
|Share capital -                                                             |             
|Ordinary shares of NIS 0.01 par value -                                     |             
|Authorized: 100,000,000 shares at December 31, 2007 and 2008; Issued and    |             
|outstanding: 16,423,740 shares at December 31, 2007 and 2008, respectively. |             
|Additional paid-in capital                                                  |             
|Accumulated other comprehensive income                                      |             
|Retained earnings                                                           |             
|                                                                            |             
|                                                                            |             
|Total shareholders' equity                                                  |             
|                                                                            |             
|                                                                            |             
|Total liabilities and shareholders' equity                                  |             
|                                                                            |             
|                                                                            |             

|*) | As
for transactions with related parties, see Note 17.
|-- | ------------------------------------------------------

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 and other expenses, net *)        |                        
|                                            |                        
|                                            |                        
|Income before taxes on income               |                        
|Taxes on income                             |                        
|                                            |                        
|                                            |                        
|Income after taxes on income                |                        
|Equity in gains (losses) of affiliates, net |                        
|Minority interest in losses of subsidiaries |                        
|                                            |                        
|                                            |                        
|Net income                                  |                        
|                                            |                        
|                                            |                        
|Net earnings per share:                     |                        
|Basic                                       |                        
|                                            |                        
|                                            |                        
|Diluted                                     |                        
|                                            |                        
|                                            |                        

|*) | As
for transactions with related parties, see Note 17.
|-- | ------------------------------------------------------

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

F - 5

---

---



SHAMIR OPTICAL INDUSTRY LTD. AND ITS SUBSIDIARIES

|                                               
|-----------------------------------------------
|CONSOLIDATED STATEMENTS OF 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, 2006                         |                  |               |                            | 16,256,514                  |                                        | $                 | 37                         |                           
|Compensation in respect of options to employees       |                  |               |                            | -                           |                                        |                   | -                          |                           
|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                         |                           
|Cumulative impact of change in accounting for         |                  |              
|uncertainties in income taxes (FIN 48)                |                  |               |                            | -                           |                                        |                   | -                          |                           
|Distribution of earnings to shareholders              |                  |              
|($0.244 per share)                                    |                  |               |                            | -                           |                                        |                   | -                          |                           
|Stock-based compensation related to options to        |                  |              
|employees and consultants                             |                  |               |                            | -                           |                                        |                   | -                          |                           
|Exercise of options granted to employees              |                  |               |                            | 167,226                     |                                        |                   | *)                         |                           
|Comprehensive income:                                 |                  |              
|Foreign currency translation adjustments              |                  |               |                            | -                           |                                        |                   | -                          |                           
|Unrealized gain on short-term investments, net of tax |                  |               |                            | -                           |                                        |                   | -                          |                           
|Net income                                            |                  |               |                            | -                           |                                        |                   | -                          |                           
|                                                      |                  |               |                            |                             |                                        |                   |                            |                           
|Total comprehensive income                            |                  |               |                            |                             |                                        |                   |                            |                           
|                                                      |                  |               |                            |                             |                                        |                   |                            |                           
|Balance as of December 31, 2007                       |                  |               |                            | 16,423,740                  |                                        |                   | 37                         |                           
|Distribution of earnings to shareholders ($0.243 per  |                  |              
|share)                                                |                  |               |                            | -                           |                                        |                   | -                          |                           
|Stock-based compensation related                      |                  |              
|to options to employees                               |                  |               |                            | -                           |                                        |                   | -                          |                           
|Comprehensive income:                                 |                  |              
|                                                      |                  |               |                            |                             |                                        |                   |                            |                           
|Foreign currency translation adjustments              |                  |               |                            | -                           |                                        |                   | -                          |                           
|Unrealized gain on short-term investments, net of tax |                  |               |                            | -                           |                                        |                   | -                          |                           
|Net income                                            |                  |               |                            | -                           |                                        |                   | -                          |                           
|                                                      |                  |               |                            |                             |                                        |                   |                            |                           
|Total comprehensive income                            |                  |               |                            |                             |                                        |                   |                            |                           
|                                                      |                  |               |                            |                             |                                        |                   |                            |                           
|Balance as of December 31, 2008                       |                  |               |                            | 16,423,740                  |                                        | $                 | 37                         |                           
|                                                      |                  |               |                            |                             |                                        |                   |                            |                           
|                                                      |                  |               |                            |                             |                                        |                   |                            |                           

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

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

|***) | Represent
an amount of $ 977, $ 1,597 and $ (2,633) foreign currency translation
                    adjustment as of December 31, 2006, 2007 and 2008 respectively, and $
(19) loss,                     $ 31 gain and $ (4) loss on short-term investment, net of
tax as of December 31,                     2006, 2007 and 2008 respectively.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The accompanying notes are 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 provided by  |                        
|(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 (gains) of affiliates, net                           |                        
|Minority interest in losses of subsidiaries                           |                        
|Interest receivable on marketable securities                          |                        
|Foreign currency translation gains                                    |                        
|Decrease (increase)in trade receivables                               |                        
|Increase in other accounts receivable and prepaid expenses and in     |                        
|long term receivables                                                 |                        
|Decrease (increase) in inventory                                      |                        
|Increase (decrease) in trade payables                                 |                        
|Increase (decrease) 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                                              |                        
|Additional consideration on Shamir Insight Inc. ("SII") prior         |                        
|acquisitions (see Note 1c)                                            |                        
|Acquisition of Spherical Optics (a)                                   |                        
|Acquisition of Shamir Or                                              |                        
|Acquisition of Shamir Israel (b)                                      |                        
|Acquisition of CIO and Shalens (c)                                    |                        
|Purchase of property, plant and equipment                             |                        
|Purchase of intangible assets                                         |                        
|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 marketable securities and other short-term investments    |                        
|Proceeds from sale of marketable securities and other 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                              |                        
|Receipt of long-term loans                                         |                        
|Repayment of long-term loans                                       |                        
|Repayment of long-term loans in capital lease                      |                        
|                                                                   |                        
|                                                                   |                        
|Net cash provided by (used in) financing activities                |                        
|                                                                   |                        
|                                                                   |                        
|Effect of exchange rate differences on cash and cash equivalents   |                        
|                                                                   |                        
|                                                                   |                        
|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:                                              |                        
|                                                                   |                        
|Purchase of property, plant and equipment in capital lease         |                        
|                                                                   |                        
|                                                                   |                        
|Purchase of intangible assets to be paid in future periods         |                        
|                                                                   |                        
|                                                                   |                        
|Additional consideration on SII prior acquisitions(see Note 1c)    |                        
|                                                                   |                        
|                                                                   |                        
|Grant from the Portuguese government                               |                        
|                                                                   |                        
|                                                                   |                        
|Acquisition of minority interest in Shamir Optic GmbH (d)          |                        
|                                                                   |                        
|                                                                   |                        
|Grant from the Israeli government (see Note 15 d)                  |                        
|                                                                   |                        
|                                                                   |                        
|                                                                   |                        
|Long-term loan written off                                         |                        
|                                                                   |                        
|                                                                   |                        
|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 Spherical Optics (PTY) Ltd:                  |                        
|    |                                                             |                        
|    | 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                                           |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|(b) | Acquisition of Shamir Israel Optical Marketing Ltd:         |                        
|    |                                                             |                        
|    | Fair value of assets acquired 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 and other long-term liabilities             |                        
|    | Long-term deferred tax liabilities                          |                        
|    |                                                             |                        
|    |                                                             |                        
|    | Net assets acquired                                         |                        
|    |                                                             |                        
|    | Investment in Shamir Israel Optical Marketing Ltd. prior to |                        
|    | acquisition that was accounted for by the equity method and |                        
|    | shareholder's loans                                         |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        
|    |                                                             |                        

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

F - 9

---

---



SHAMIR OPTICAL INDUSTRY LTD. AND ITS SUBSIDIARIES

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

|    |                                                               | Year ended December 31,
|--- | ------------------------------------------------------------- | -----------------------
|
|
|
|
|(c) | Acquisition of Centro Integral Optico S.A. de C.V.("CIO") and |                        
|    | Shalens S.A. de C.V. ("Shalens")                              |                        
|    |                                                               |                        
|    | 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 and other long-term liabilities               |                        
|    | Long-term deferred tax liabilities                            |                        
|    |                                                               |                        
|    | Net assets acquired                                           |                        
|    | Investment in CIO and Shalens prior to acquisition that was   |                        
|    | accounted for by the equity method and shareholder's loans    |                        
|    | Minority interest                                             |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|(d) | Acquisition of minority interests in Shamir Optic GmbH        |                        
|    | (formally known as Altra Trading GMBH ("Shamir GmbH"))        |                        
|    |                                                               |                        
|    | Fair value of assets acquired and liabilities assumed at the  |                        
|    | acquisition date:                                             |                        
|    |                                                               |                        
|    | Property and equipment                                        |                        
|    | Customer relationship                                         |                        
|    | Goodwill adjustment                                           |                        
|    | Other long-term liabilities                                   |                        
|    | Long-term deferred tax liabilities, net                       |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        
|    |                                                               |                        

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

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

| | 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.
As of December 31, 2008, Shamir had 17 subsidiaries all over the world. Some of the
subsidiaries engage in production of Shamir products, some are optical laboratories that
process lenses for the opticians, and some engage in marketing and distributing the
products.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 16, 2005, the Company completed an Initial Public Offering (IPO) on 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).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. In addition, a certain part of the production process of Shamirs
lenses is supplied by a limited number of world wide sub-contractors. The loss of any one
of these suppliers or sub-contractors, or a significant decrease in the supply of glass
blanks, monomers or services, would require Shamir to obtain these raw materials or
services elsewhere. If Shamir is unable to obtain glass blanks, monomers or services from
its suppliers (or alternative suppliers) or sub-contractors at acceptable prices, Shamir
may realize lower margins and experience difficulty in meeting its customers requirements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
acquisition was accounted for as a business combination by the purchase method and,
accordingly, the purchase price has been allocated to the fair value of the assets
acquired and liabilities assumed of Spherical with the remaining representing goodwill.
The results of Sphericals operations have been included in the consolidated
financial statements of Shamir starting January 2, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | c. | Additional
acquisition of shares in SII:
| | -- | ----------------------------------------

| | On
July 31, 2005, Shamir signed an agreement to purchase an additional 31.3% stake in SII,
increasing Shamirs ownership interest in SII to 90%. 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 additional consideration regarding this purchase in respect of 2006,
2007 and 2008 earnings is $ 449, $ 139 and $ 488 respectively, and as of December 31,
2006, 2007 and 2008, the goodwill increased accordingly.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 17, 2007, Shamir signed an agreement to purchase an additional 10% of the
outstanding shares of SII, increasing Shamirs ownership interest in SII to 100%.
Under the terms of the agreement Shamir will pay a discounted amount of $ 346 over the
next four years, and annual contingent cash payments based on SIIs revenues in the
years 2007 to 2010. Therefore, as of December 31, 2007 and 2008, Shamir recorded a
liability in the amounts of $ 427 and $ 180, respectively, related to this purchase.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 regarding this purchase in respect of 2007 and 2008 earnings is
$ 81 and $ 189 respectively, and as of December 31, 2007 and 2008, the goodwill increased
accordingly.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
acquisition was accounted for by the purchase method and accordingly, the purchase price
has been allocated to the estimated fair value of the identifiable assets acquired and
identifiable liabilities assumed of SII, with the remaining representing goodwill. The
fair values of the assets acquired, liabilities assumed and the buyout of the minority
interest are not provided due to immateriality.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
the acquisition of additional shares of SII, Shamir increased its control of a critical
distribution channel in the U.S.A., and obtained full control of SII.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | d. | Acquisition
of CIO and Shalens:
| | -- | -------------------------------

| | On
August 15, 2006, a Share Acquisition Agreement was made, by and between CIO, a Mexican
company, its shareholders and Shamir. Shamir acquired a 26% stake in CIO. In addition, as
part of the Share Acquisition Agreement, Shamir was granted an option to increase its
stake by an additional 25% to a total of 51%. On February 20, 2008, Shamir exercised its
option and acquired an additional stake of 25% in CIO and Shalens (a sister company of
CIO located in Mexico) for a consideration of $ 2,860.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 CIO and Shalens, with the remaining representing goodwill. The results of CIO
and Shalens operations have been included in the consolidated financial statements of
Shamir commencing February 20, 2008.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
the acquisition of CIO and Shalens, Shamir expanded its presence in the Mexican optical
market.
| | ----------------------------------------------------------------------------------------------------

| | Based
upon a valuation, the following table summarizes the fair values of the assets acquired
and liabilities assumed as of the acquisition date:
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                        | 
| | ---------------------------------------------------------------------- | 
|
|
|
|
| | Current assets                                                         | 
| | Property and equipment                                                 | 
| | Long-term deferred tax assets                                          | 
| | Customer relationships                                                 | 
| | Goodwill                                                               | 
| |                                                                        | 
| |                                                                        | 
| | Total assets acquired                                                  | 
| |                                                                        | 
| |                                                                        | 
| | Current liabilities                                                    | 
| | Long-term loans and other liabilities                                  | 
| | Long-term deferred tax liability                                       | 
| |                                                                        | 
| |                                                                        | 
| | Total liabilities assumed                                              | 
| |                                                                        | 
| |                                                                        | 
| | Net assets acquired                                                    | 
| |                                                                        | 
| |                                                                        | 
| | Investments in CIO and Shalens prior to acquisition that was accounted | 
| | for by the equity method and shareholder's loans                       | 
| |                                                                        | 
| | Minority interests                                                     | 
| |                                                                        | 
| |                                                                        | 
| | Total Purchase Price                                                   | 
| |                                                                        | 
| |                                                                        | 

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

| | Customer
relationships in the amount of $ 2,208 (including $ 1,081 amortized cost of customer
relationships allocated at the acquisition of the first 26% stake in CIO) with definite
live are amortized using the straight-line method at an average annual rate of
approximately 10%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pro-forma
information is provided in note 1(f) bellow.
| | ------------------------------------------------------

| | e. | Acquisition
of minority interests in Shamir GmbH:
| | -- | -------------------------------------------------

| | On
July 1, 2008 Shamir acquired the remaining 49% of the outstanding shares of Shamir GmbH,
increasing Shamirs ownership interest in Shamir GmbH and its subsidiaries to 100%.
The total purchase price amounted to $357. In addition, under the terms of the agreement
Shamir will pay a contingent cash payment based on Shamir GmbH consolidated net income in
the years 2008 to 2010 up to a sum of 500 thousands euro (approximately $ 697) that will
be paid on June 30, 2011.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Should
any contingent payment be accrued under the agreement in the future, in addition to the
amounts accrued until December 31, 2008, 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 identifiable assets acquired and
identifiable liabilities assumed of Shamir GmbH and its subsidiaries, with the remaining
representing goodwill.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
the acquisition of additional shares of Shamir GmbH, Shamir obtained full control of
Shamir GmbH.
| | ------------------------------------------------------------------------------------------------------

| | Based
upon a valuation, the following table summarizes the fair values of the assets acquired
and liabilities assumed as of the acquisition date:
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| |                                       | 
| | ------------------------------------- | 
|
|
|
|
| | Land and buildings                    | 
| | Customer relationships                | 
| | Goodwill adjustment                   | 
| | Long-term other liabilities           | 
| | Long-term deferred tax liability, net | 
| |                                       | 
| |                                       | 
| | Total Purchase Price                  | 
| |                                       | 
| |                                       | 

| | Customer
relationships in the amount of $ 346 with definite live are amortized using the
straight-line method at an average annual rate of approximately 17%.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | f. | Unaudited
pro-forma condensed results of operation:
| | -- | ---------------------------------------------------

| | The
following represents the pro-forma results of operations for the years ended December 31,
2006, 2007 and 2008, assuming that the acquisition of CIO and Shalens occurred on January 1,
2006, 2007 and 2008, respectively. The pro-forma information is not necessarily
indicative of the results of operations, which actually would have occurred if the
acquisitions had been consummated at the beginning of each period presented, nor does it
purport to represent the results of operations for future periods.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                | Year ended December 31,
| | ------------------------------ | -----------------------
|
|
|
|
| | Revenues, net                  |                        
| |                                |                        
| |                                |                        
| | Net income                     |                        
| |                                |                        
| |                                |                        
| | Basic net earnings per share   |                        
| |                                |                        
| |                                |                        
| | Diluted net earnings per share |                        
| |                                |                        
| |                                |                        

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

| | The
 consolidated  financial  statements  have been  prepared  according  to U.S.  generally
              accepted accounting principles ("U.S. GAAP").
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Use
of estimates:
| | -- | -----------------

| | The
preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates, judgment and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Shamirs management believes that the estimates,
judgment and assumptions used are reasonable based upon information available at the time
they are made.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | A
majority of the revenues of the Company and certain subsidiaries are generated in United
States dollars (dollars). The Companys management believes that the
dollar is the currency of the primary economic environment in which the Company and these
certain subsidiaries operate. Thus, the functional and reporting currency of the Company
and these certain subsidiaries is the U.S. dollar.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
monetary accounts maintained in currencies other than the dollar are re-measured into
dollars in accordance with SFAS No. 52, Foreign Currency Translation. All
transaction gains and losses of the re-measured 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 for that currency. Translation adjustments are recorded in accumulated
other comprehensive income, a separate component of shareholders equity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | c. | Principles
of consolidation:
| | -- | ----------------------------

| | The
consolidated financial statements include the accounts of the Company and its
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
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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Investments
in marketable securities:
| | -- | -------------------------------------

| | The
Company accounts for investments in marketable securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities (SFAS
No. 115).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
determines the appropriate classification of its investments at the time of purchase and
reevaluates such determinations at each balance sheet date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company classifies all of its securities as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net of tax,
reported in accumulated other comprehensive income (loss)" in shareholders equity.
The amortized cost of marketable securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in financial income,
net. Interest on securities is included in financial and other expenses, net. Realized
gains and losses on sale of investments are included in earnings and are derived using
the specific identifications method for determining the cost of securities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impairment
losses are recognized as realized or when the Company has determined that
other-than-temporary decline in fair value has occurred. FASB Staff Position (FSP)
No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investment (FSP 115-1) and SAB Topic 5M, Other Than
Temporary Impairment of Certain Investments in Debt and Equity Securities provide
guidance for determining when an investment is considered impaired, whether impairment is
other-than-temporary, and measurement of an impairment loss. An investment is considered
impaired if the fair value of the investment decreased below its cost in an
other-than-temporary manner. 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. During 2008, 2007 and
2006, no impairment losses were identified in accordance with FSP 115-1.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | g. | 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 first in  first outmethod.
| | ----------------------------------------------------------------------------

| | Finished
products  finished products that are produced by Shamir are recorded on the basis
of direct manufacturing costs with the addition of allocable indirect manufacturing
costs, using the first in  first out method. Finished products that are
purchased for commercial purposes are recorded using the first in  first out method.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Inventory
provisions are provided to cover risks arising from slow-moving items and discontinued
products.
| | ----------------------------------------------------------------------------------------------------------

| | h. | Investments
in affiliates and others:
| | -- | -------------------------------------

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

| | The
investment in affiliated companies is accounted for by the equity method. Profits on
inter-company sales, not realized outside Shamir, 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 6.4
years, commencing from the acquisition date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments
in companies in which Shamir holds less than 20% are stated at cost, since Shamir does
not have the ability to exercise significant influence over the 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, 2008, 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.)
|------- | - | ---------------------------------------

| | i. | Property,
plant and equipment:
| | -- | ------------------------------

| | 1. | Property,
plant and equipment are stated at cost, net of accumulated           depreciation and
investment grants.
| | -- | ------------------------------------------------------------------------------------------------------------------

| | 2. | Materials,
payroll and other costs that are direct incremental costs necessary           to bring an
asset to the condition of its intended use incurred during the           construction are
capitalized to the cost of such assets.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Depreciation
is calculated by the straight-line method over the estimated           useful lives of
the assets at the following annual rates:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------

| |                                       | %      
| | ------------------------------------- | -------
|
|
|
|
| | Machinery and manufacturing equipment | 7 - 40 
| | Office equipment and furniture        | 7 - 33 
| | Motor vehicles                        | 15 - 25
| | Buildings                             | 4 - 5  

| | Leasehold
improvements are depreciated by the straight-line method over the shorter of the lease or
the estimated useful life of the improvements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | Shamir
has accounted for its fixed assets which are under a capital lease arrangement in
accordance with SFAS 13 Accounting for Leases. Accordingly, fixed assets
under a capital lease are stated as assets of Shamir on the basis of ordinary purchase
prices (without the financing component), and they are depreciated according to the usual
depreciation rates applicable to such assets. The lease payments payable in 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. | 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            | 27                
| | Customer relationship | 15                
| | Non competition       | 33                
| | Distribution channels | 20                
| | Patents               | 10                
| | Trade name            | 20                
| |                       |                   

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

| | k. | 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. During 2008, 2007 and 2006, no impairment losses have
been identified.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Goodwill:
| | -- | ---------

| | Goodwill
represents the excess of the cost of businesses acquired over the fair value of the net
assets acquired in the acquisition.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (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 the Companys market capitalization. The Company performs
the impairment tests during the fourth fiscal quarter. In addition, in accordance with
the provisions of SFAS No. 142, as a result of the global credit crisis, the Company
performed an additional impairment test as of December 31, 2008. During 2008, 2007 and
2006, no impairment losses were identified.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | m. | 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 in
the operating expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | Research
and development costs:
| | -- | -------------------------------

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

| | o. | Income
taxes:
| | -- | -------------

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

| | On
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" (FIN 48).
FIN 48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is to evaluate
the tax position taken or expected to be taken in a tax return by determining if the
weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes. The second step is
to measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the implementation of FIN No. 48, the Company recognized a $ 481 increase in
liability for unrecognized tax benefits, which was accounted for as a decrease to the
January 1, 2007 balance of retained earnings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Advertising
expenses:
| | -- | ---------------------

| | Advertising
costs are expensed as incurred. Advertising expenses for the years ended December 31,
2006, 2007 and 2008, were $ 2,964, $ 2,566 and $ 2,366, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Financial
instruments that potentially subject Shamir to concentrations of credit risk consist
principally of cash and cash equivalents, short-term deposits, marketable securities and
trade receivables.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
majority of Shamirs cash and cash equivalents and short-term deposits are invested
mainly in dollar and Euro instruments with major banks in Israel, Germany and the U.S.
Deposits in the U.S. may be in excess of insured limits and are not insured in other
jurisdictions.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Marketable
securities include investments in debentures of U.S. treasury, U.S. government agencies
and corporations. Shamirs investment policy provides for a minimum grading of
debentures in which Shamir can invest, thereby reducing credit risk.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 and other expenses, net.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Severance
pay:
| | -- | --------------

| | Shamirs
liability for severance pay is calculated pursuant to Israels Severance Pay Law
based on the most recent salary of Shamirs Israeli employees multiplied by the
number of years of employment, as of balance sheet date. These employees are entitled to
one months salary for each year of employment or a portion thereof. Shamirs
liability for these employees is fully provided by monthly deposits for insurance
policies and by an accrual.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
deposited funds include profits and losses accumulated up to the balance sheet date. The
deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to
Israels Severance Pay Law or labor agreements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shamir
and its Israeli subsidiaries have entered into an agreement with certain employees
implementing Section 14 of the Severance Pay Law and the General Approval of the Labor
Minister dated June 30, 1998, issued in accordance to the said Section 14, mandating that
upon termination of such employees employment, the company shall release to them
all the amounts accrued in their insurance policies. The severance pay liabilities and
deposits covered by these plans are not reflected in the balance sheet as the severance
pay risks have been irrevocably transferred to the severance funds.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
expense for the years ended December 31, 2006, 2007 and 2008, amounted to $ 504, $ 535
and $ 1,050, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------

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. | Fair
value of financial instruments:
| | -- | ------------------------------------

| | The
Company adopted the provisions of SFAS No. 157, Fair Value Measurements(SFAS
No. 157) effective January 1, 2008. Under this standard, fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability
(i.e., the exit price) in an orderly transaction between market participants
at the measurement date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
determining fair value, the Company uses various valuation approaches. SFAS No. 157
establishes a hierarchy for inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs are inputs that market
participants would use in pricing the asset or liability developed based on market data
obtained from sources independent of the Company. Unobservable inputs are inputs that
reflect the Companys assumptions about the assumptions market participants would
use in pricing the asset or liability developed based on the best information available
in the circumstances.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
hierarchy is broken down into three levels based on the observability of inputs as
follows:
| | -----------------------------------------------------------------------------------------------

| |  | Level
1  Valuations based on quoted prices in active markets for identical assets that
the Company has the ability to access. Valuation adjustments and block discounts are not
applied to Level 1 instruments. Since valuations are based on quoted prices that are
readily and regularly available in an active market, valuation of these products does not
entail a significant degree of judgment
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Level
2  Valuations based on one or more quoted prices in markets that are not active or
for which all significant inputs are observable, either directly or indirectly.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Level
3  Valuations based on inputs that are unobservable and significant to the overall
fair value measurement.
| | - | -----------------------------------------------------------------------------------------------------------------

| | The
availability of observable inputs can vary from investment to investment and is affected
by a wide variety of factors, including, for example, the type of investment, the
liquidity of markets and other characteristics particular to the transaction.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys marketable securities are traded in markets that are not considered to be
active, but are valued based on quoted market prices, broker or dealer quotations, or
alternative pricing sources with reasonable levels of price transparency and accordingly
are categorized as Level 2.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Foreign
currency and interest rate derivative contracts are classified within Level 2 as the
valuation inputs are based on quoted prices and market observable data of similar
instruments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 presents the Companys assets and liabilities measured at fair value
on a recurring basis at December 31, 2008:
| | -----------------------------------------------------------------------------------------------------------------------------------

| |                                     | Fair value measurements using input type
| | ----------------------------------- | ----------------------------------------
|
|
|
|
| | Marketable securities:              |                                         
| | Corporate debentures                |                                         
| | U.S. government agencies securities |                                         
| | U.S. Treasury                       |                                         
| | Derivatives:                        |                                         
| | Foreign currencies assets           |                                         
| | Foreign currencies liabilities      |                                         
| | Interest rates                      |                                         
| |                                     |                                         
| |                                     |                                         
| | Total                               |                                         
| |                                     |                                         
| |                                     |                                         

| | The
carrying amounts of financial instruments carried at cost, including cash and cash
equivalents, short-term deposits, trade receivables, other current assets, trade payables
and other liabilities approximate their fair value due to the short-term maturities of
such instruments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | t. | 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 1,331,660, 1,392,682 and 1,493,826 for the years ended December 31,
2006, 2007 and 2008, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Accounting
for stock-based compensation:
| | -- | ----------------------------------------

| | The
Company accounts for stock-based compensation in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS
123(R)) which requires the measurement and recognition of compensation expense
based on estimated fair values for all share-based payment awards made to employees and
directors. SFAS 123(R) 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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. SFAS 123(R) requires forfeitures to be estimated and
revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
fair value of Shamirs stock options granted to employees and directors for the
years ended December 31, 2007 and 2008, was estimated using the following assumptions:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         | Year ended
December 31,
2007 | Year ended
December 31,
2008
| | ----------------------- | ---------------------------- | ----------------------------
|
|
|
|
| | Expected volatility     | 24.99%-25.59%                | 26.72%-41.90%               
| | Risk-free interest rate | 3.28%-4.54%                  | 1.93%-2.37%                 
| | Dividend yield          | 0.81%-1.36%                  | 0%-1.23%                    
| | Forfeiture rate         | 4.48%                        | 0%                          
| | Expected term (years)   | 3.62-6.05                    | 4.58                        
| |                         |                              |                             

| | A
summary of option activity under Shamirs stock option plans as of December 31,
2008, and changes during the year then ended are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Number of
options | Weighted-average
exercise
price | Weighted-
average
remaining
contractual
term (in
years) | Aggregate
intrinsic
value as of
December
31,2008
| | -------------------------------- | ----------------- | ------------------------------- | ------------------------------------------------------- | ------------------------------------------------
|
|
|
|
| | Outstanding at January 1, 2008   |                   |                                 |                                                         | 1,657,866                                       
| | Granted                          |                   |                                 |                                                         | 317,000                                         
| | Exercised                        |                   |                                 |                                                         | -                                               
| | Forfeited and expired            |                   |                                 |                                                         | (383,830                                        
| |                                  |                   |                                 |                                                         |                                                 
| | Outstanding at December 31, 2008 |                   |                                 |                                                         | 1,591,036                                       
| |                                  |                   |                                 |                                                         |                                                 
| |                                  |                   |                                
| | Exercisable at December 31, 2008 |                   |                                 |                                                         | 896,630                                         
| |                                  |                   |                                 |                                                         |                                                 
| |                                  |                   |                                
| | Vested and expected to vest at   |                   |                                
| | December 31, 2008                |                   |                                 |                                                         | 1,591,036                                       
| |                                  |                   |                                 |                                                         |                                                 
| |                                  |                   |                                 |                                                         |                                                 

| | 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 2008 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, 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted-average grant-date fair value of options granted during the years ended December 31,
2006, 2007 and 2008, was $ 3.00, $ 2.87 and $ 0.81, respectively. The total
intrinsic value of options exercised during the years ended December 31, 2006, 2007 and
2008, was $ 0, $ 1,671 and $ 0, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, there was $ 1,028 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under Shamirs
stock option plans to employees and directors. That cost is expected to be recognized
over a weighted average period of 2.5 years. The total fair value of options vested
during the year ended December 31, 2008, was $ 1,163.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Reclassification:
| | -- | -----------------

| | Certain
amounts in prior years financial statements have been reclassified to conform to
the current years presentation.
| | --------------------------------------------------------------------------------------------------------------------------

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

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

| | In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R). SFAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any non-controlling interest
in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after December 15,
2008. Earlier adoption is prohibited. The Company believes that the adoption of SFAS 141R
could have an impact on its consolidated financial statements; however, the impact would
depend on the nature, terms and magnitude of acquisitions it consummates in the future.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS 160 (SFAS No. 160), Noncontrolling
Interests in Consolidated Financial Statements. SFAS 160 amends Accounting Research
Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the noncontrolling interest.
It also requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the noncontrolling
interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008. The adoption of SFAS 160 is not expected to have a material
effect on accounting for the Companys current subsidiaries.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2, Effective
Date of FASB Statement No. 157 (FSP 157-2), to delay the effective
date of FASB Statement 157 for one year for certain nonfinancial assets and nonfinancial
liabilities, excluding those that are recognized or disclosed in financial statements at
fair value on a recurring basis (that is, at least annually).  For purposes of
applying the FSP 157-2, nonfinancial assets and nonfinancial liabilities include all
assets and liabilities other than those meeting the definition of a financial asset or a
financial liability in FASB Statement 159.   FSP 157-2 defers the effective
date of Statement 157 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of this FSP 157-2. The
Company does not expect the adoption of FSP 157-2 to have a material impact on its
financial position, results of operations or cash flows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December
15, 2008. The Company does not expect the adoption of FSP 142-3 to have a material impact
on the Companys financial position, results of operations or cash flows.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. It is effective 60 days following
the SECs approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. The Company is currently evaluating the impact of SFAS No.
162 on its financial statements, and the adoption of this statement is not expected to
have a material effect on the Companys financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | a. | The
following is a summary of the Shamirs short-term investments:
| | -- | ------------------------------------------------------------------

|                             | December 31,
|---------------------------- | ------------
|
|
|
|
|Short-term deposits          |             
|Marketable securities        |             
|                             |             
|                             |             
|Total short-term investments |             
|                             |             
|                             |             

| | b. | The
following is a summary of the Shamirs investments in marketable
          securities:
| | -- | ------------------------------------------------------------------------------------------

| |                                     | December 31, 2007
| | ----------------------------------- | -----------------
|
|
|
|
| | Available-for-sale:                 |                  
| |                                     |                  
| | Corporate debentures                |                  
| | U.S. government agencies securities |                  
| |                                     |                  
| |                                     |                  
| | Total                               |                  
| |                                     |                  
| | Accrued interest                    |                  
| |                                     |                  
| |                                     |                  
| |                                     |                  

| |                                     | December 31, 2008
| | ----------------------------------- | -----------------
|
|
|
|
| | Available-for-sale:                 |                  
| |                                     |                  
| | Corporate debentures                |                  
| | U.S. treasury                       |                  
| | U.S. government agencies securities |                  
| |                                     |                  
| |                                     |                  
| | Total                               |                  
| |                                     |                  
| | Accrued interest                    |                  
| |                                     |                  
| |                                     |                  
| |                                     |                  
| |                                     |                  

| | As
of December 31, 2008, the gross unrealized gains amounted to $ 7 and the gross
unrealized losses amounted to $ 13.
| | ---------------------------------------------------------------------------------------------------------------------

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 (Cont.)
|------- | - | ------------------------------

| | c. | The
amortized cost and fair value of marketable securities as of           December 31,
2008, by contractual maturity, are shown below:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------

| |                                           | December 31, 2008
| | ----------------------------------------- | -----------------
|
|
|
|
| | Matures in one year                       |                  
| | Matures after one year through five years |                  
| |                                           |                  
| |                                           |                  
| | Total                                     |                  
| |                                           |                  
| |                                           |                  

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

| |                                 | December 31,
| | ------------------------------- | ------------
|
|
|
|
| | Prepaid expenses                |             
| | Government authorities          |             
| | Deferred tax assets             |             
| | Related parties                 |             
| | Government grants and subsidies |             
| | Employees                       |             
| | Derivatives                     |             
| | Other                           |             
| |                                 |             
| |                                 |             
| |                                 |             
| |                                 |             
| |                                 |             

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

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

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

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

| |                                      |  | December 31,
| | ------------------------------------ |  | ------------
|
|
|
|
| | Centro Integral Optico S.A. de C.V.  |  |             
| | Shalens S.A. de C.V.                 |  |             
| | Siam Optical Technology Company Ltd. |  |             
| | ("SOT") **)                          |  |             
| | Optispeed Laboratory (PTY) Ltd.      |  |             
| | ("Optispeed") ***)                   |  |             
| | e-Vision LLC                         |  |             
| |                                      |  |             

| | *) | On
February 20, 2008, Shamir acquired an additional 25% of the ownership           interest
and the voting power in CIO and Shalens, following which Shamir           increased its
ownership to 51% in both sister companies. Since the acquisition           date, these
companies are consolidated.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **) | On
November 27, 2008, Shamir acquired an additional 14.6% of SOT Ordinary           Shares
and increased its holdings in SOTs Ordinary Shares to a total of           40.4%.
Shamir paid a consideration of $ 134 in cash to the selling shareholders.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ***) | On
November 1, 2008, Shamir (through it subsidiary Spherical) acquired 25% of           the
ownership interest and the voting power in Optispeed, an optical laboratory           in
South Africa.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ****) | Less
than 20% ownership. Shamir does not have significant influence over           operating
and financial policy of the affiliate. The investment is accounted for
          according to the cost method.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |              | December 31,
| | ------------ | ------------
|
|
|
|
| | CIO          |             
| | Shalens      |             
| | SOT          |             
| | Optispeed    |             
| | e-Vision LLC |             
| |              |             
| |              |             
| |              |             
| |              |             
| |              |             

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

| | c. | Additional
information  investment in SOT and Optispeed:
| | -- | ---------------------------------------------------------

| |                                           | SOT | Optispeed
| | ----------------------------------------- | --- | ---------
|
|
|
|
| | Investment in shares and option *)        |     |          
| |                                           |     |          
| | Long-term loans **)                       |     |          
| |                                           |     |          
| |                                           |     |          
| | Total investments as of December 31, 2008 |     |          
| |                                           |     |          
| |                                           |     |          

| | *) | Shamir
has an option to increase its holdings in SOT to 49% of the ordinary           shares and
51% of the voting rights. The option expires on March 31, 2010. The           option
price, should it be exercised in full, is an additional $ 80 in cash that           would
be paid to SOT and certain shareholders.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **) | The
loans to SOT bear no interest rate.
| | --- | ---------------------------------------

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

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

| | Depreciation
expense totaled $ 5,282, $ 5,094 and $ 7,778 for the years ended December
31, 2006, 2007 and 2008, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2007 and 2008, property and equipment under capital leases consisted of
assets with a depreciated cost of $ 8,089 and $ 6,044, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
of property and equipment under capital leases totaled $ 1,535, $ 1,599 and $ 1,592
for the years ended December 31, 2006, 2007 and 2008, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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 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         |             
| | Patents                       |             
| | Trade name                    |             
| |                               |             
| |                               |             
| |                               |             
| |                               |             
| | Accumulated amortization:     |             
| | Technology                    |             
| | Customer relationship         |             
| | Non-competition               |             
| | Distribution channels         |             
| | Patents                       |             
| | Trade name                    |             
| |                               |             
| |                               |             
| |                               |             
| |                               |             
| |                               |             
| | Total other intangible assets |             
| |                               |             
| |                               |             

| | (2) | Amortization
expense amounted to $ 968, $ 1,058 and $ 1,291 for the           years ended
December 31, 2006, 2007 and 2008, respectively.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------

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

| |                     |  | 
| | ------------------- |  | 
|
|
|
|
| | 2009                |  | 
| | 2010                |  | 
| | 2011                |  | 
| | 2012                |  | 
| | 2013 and thereafter |  | 
| |                     |  | 
| |                     |  | 
| |                     |  | 
| |                     |  | 
| |                     |  | 

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

| | The
changes in the carrying amount of goodwill for the years ended December 31, 2007 and
2008, are as follows:
| | --------------------------------------------------------------------------------------------------------------

| |                                                         | 
| | ------------------------------------------------------- | 
|
|
|
|
| | Balance as of January 1, 2007                           | 
| | Goodwill acquired during the year                       | 
| | Additional consideration in respect of 2007 earnings *) | 
| | Foreign currency translation adjustments                | 
| |                                                         | 
| |                                                         | 
| | Balance as of December 31, 2007                         | 
| | Goodwill acquired during the year                       | 
| | Additional consideration in respect of 2008 earnings *) | 
| | Foreign currency translation adjustments                | 
| |                                                         | 
| |                                                         | 
| | Balance as of December 31, 2008                         | 
| |                                                         | 
| |                                                         | 

| | *) | 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, 2008, Shamir had authorized unused credit lines from banks in the amount
of approximately $ 4,861.
| | ---------------------------------------------------------------------------------------------------------------------

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

| |                                                          | December 31,
| | -------------------------------------------------------- | ------------
|
|
|
|
| | Employees and payroll accruals                           |             
| | Accrued expenses                                         |             
| | Advances from customers                                  |             
| | Government authorities                                   |             
| | Related party                                            |             
| | Former shareholders in SII                               |             
| | Current maturity of intangible assets long term payments |             
| | Derivatives                                              |             
| | Others                                                   |             
| |                                                          |             
| |                                                          |             
| |                                                          |             
| |                                                          |             
| |                                                          |             

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

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

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

| | *)
           No repayment date was set for the loans from minority shareholders in
          subsidiaries. These loans are not due in the 12 months following December 31,
          2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **)
           Including a loan from a former shareholder in Shamir GmbH in the amount of
          $5,909 and $4,950 as of December 31, 2007 and 2008, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                           |  | 
| | ------------------------- |  | 
|
|
|
|
| | 2009 (current maturities) |  | 
| | 2010                      |  | 
| | 2011                      |  | 
| | 2012                      |  | 
| | 2013 and thereafter       |  | 
| |                           |  | 
| |                           |  | 
| |                           |  | 
| |                           |  | 
| |                           |  | 

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

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

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

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

| |                           |  | 
| | ------------------------- |  | 
|
|
|
|
| | 2009 (current maturities) |  | 
| | 2010                      |  | 
| | 2011                      |  | 
| | 2012                      |  | 
| | 2013 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:
| | -- | ------------------

| | From
time to time, Shamir 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 or labor disputes with former employees. Shamir is involved in one dispute
concerning allegations of breach of third parties patents, as described below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2003, Shamir received a notice from a large lens manufacturer regarding 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2008, Shamir received a notice from a shareholder of one of its subsidiaries
claiming unlawful use of the subsidiaries intellectual property and unjust
enrichment. Shamir denied any such infringement, and numerous discussions between
the parties (and counsel) ensued in order to resolve the matter without resorting to
litigation. Shamir currently cannot predict the development or ultimate outcome of the
discussions with regard to these claims.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2008 are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |            |  | 
| | ---------- |  | 
|
|
|
|
| | 2009       |  | 
| | 2010       |  | 
| | 2011       |  | 
| | 2012       |  | 
| | 2013       |  | 
| | Thereafter |  | 
| |            |  | 
| |            |  | 
| |            |  | 
| |            |  | 
| |            |  | 

| | Lease
expenses, net for the years ended December 31, 2006, 2007 and 2008 were approximately $ 721,
$ 843, and $ 1,299, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------

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

| | c. | Pledges
and guarantees:
| | -- | -----------------------

| | 1. | In
order to secure Government grants received by the Company, under the           Approved
Enterprise programs pursuant to the Law for the           Encouragement of Capital
Investments, 1959, the Company granted pledges in favor           of the State of Israel
on all of its assets, by floating charges in an unlimited           amount (see also Note 15d).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Certain
subsidiaries of the Company pledged their land and buildings in an           aggregate
amount of approximately $ 6,047 to secure commitments to banks.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
order to secure government subsidies received by a subsidiary, the           subsidiary
gave the State of Israel a bank guarantee in the amount of           approximately $ 104.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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, the
          Companys tax expenses 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 its legal status from an ACS to an Israeli limited Company which
          occurred in March 2005.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Measurement
of taxable income:
| | -- | ------------------------------

| | The
Company and its subsidiaries Eyal Optical Industries (1995) Ltd. (Eyal) and
Shamir Special Optical Products Ltd. (SSOP) had 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. During 2008, the Company and Eyal, elected to measure their Israeli
taxable income in NIS rather than in the exchange rate of NIS against the U.S. dollar.
This election is applicable for a period of four taxable years commencing on January 1,
2007. The Company was permitted to make such change pursuant to regulations published by
the Israeli Minister of Finance, which provide the conditions for such change. Therefore,
the Company and Eyal re-measured their 2007 taxable income during 2008. In general, a
company that elects to apply these regulations can not change its resolution for a period
of three years following the fiscal year of such election.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
result the Companys and Eyals income for tax purposes are measured and
reflected in accordance with the change in the Israeli Consumer Price Index (CPI)
in accordance with the Income Tax (Inflationary Adjustments) Law, 1985. As explained
above in Note 2(B), the consolidated financial statements are presented in U.S. dollars.
The differences between the change in the Israeli CPI and in the NIS/U.S. dollar exchange
rate cause a difference between taxable income and the income before taxes reflected in
the consolidated financial statements. In accordance with paragraph 9(f) of SFAS No. 109,
the Company has not provided deferred income taxes on the above differences resulting
from changes in exchange rates and indexing for tax purposes.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2008, the Knesset passed an amendment to the Income Tax (Inflationary
Adjustments) Law, 1985, which limits the scope of the law starting in 2008 and
thereafter. Starting in 2008, the results for tax purposes are measured in nominal
values, excluding certain adjustments for changes in the Consumer Price Index carried out
in the period up to December 31, 2007. The amended law includes, inter alia, the
elimination of the inflationary additions and deductions and the additional deduction for
depreciation starting in 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred
income taxes on the above difference between the reporting currency and the tax basis of
assets and liabilities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Tax
benefits under Israels Law for the Encouragement of Industry           (Taxation),
1969:
| | -- | ---------------------------------------------------------------------------------------------

| | The
Company and certain of its Israeli subsidiaries currently qualify as Industrial
Companies pursuant to the Industry Encouragement Law. As such, the Company and
these subsidiaries are entitled to certain tax benefits, including the right to deduct
public issuance expenses, accelerated depreciation rates for tax purposes and the option
to file a consolidated tax return with related Israeli industrial corporations that
satisfy conditions described in the law. Currently, the Company files consolidated tax
returns together with SSOP.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Eligibility
for benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any government authority, but is subject to their inspection. Shamir cannot
assure that the Company or any of its Israeli subsidiaries that presently qualify as
Industrial Companies will continue to qualify as such in the future, or that the benefits
will be granted in the future.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 the Company or any of its subsidiaries has been granted Approved
Enterprise status and operates under more than one approval, or that their capital
investments are only partly approved, the effective corporate tax rate will be the result
of a weighted combination of the various rates applicable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company has three existing programs that have been granted
Approved Enterprise status under the Law. According to the Law, the Company
is entitled to investment grants (up to 30% of investment cost) and also to a tax
benefit, which grants Shamir a 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 programs was tax-exempt for a period of two
years, commencing in 1999, 2001, and 2005, 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 tax year).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys income from sources other than Approved Enterprises during the
benefits period will be taxable at the regular corporate tax rate.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

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 (Cont.)
|-------- | - | -----------------------

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

| | Eyals
income from sources other than the Approved Enterprises during the benefits
period is taxable at the regular corporate tax rate.
| | -----------------------------------------------------------------------------------------------------------------------------------------

| | The
period of tax benefits detailed above is subject to limits of the earlier of 12 years
from the commencement of production or 14 years from receiving the approval. The Law also
entitles the Company and Eyal to claim accelerated depreciation on equipment used by an
Approved Enterprise.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Should
the Company or Eyal fail to meet such requirements in the future, income attributable to
their programs could be subject to the statutory Israeli corporate tax rate and the
Company could be required to refund a portion of the tax benefits and grants already
received, with respect to such program. The Companys management believes that the
Company is meeting the aforementioned conditions.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 Beneficiary Enterprise, such as provisions
generally requiring that at least 25% of the Beneficiary 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 letter 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 SSOP received a pre-ruling from the tax authorities in Israel, according to
which the Company was declared as a Privileged Enterprise (establishment), so
that all of its income from the abovementioned facilities will be exempted from tax for a
period of 10 years beginning with the year in which the Company first had taxable income.
As of December 31, 2008, SSOP has not begun to enjoy the tax benefits due to its
accumulated losses. In addition, during the fiscal year 2008, a portion of Eyalsactivities
have been acting under the status of a Privileged Enterprise under the amendment to the
Investment Law. As stated above, Eyals status as a Privileged Enterprise is subject
to the approval of the Israeli Tax Authorities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event of a 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, 2008, retained earnings included approximately $ 11,156 in tax-exempt
profits earned by the Companys Approved Enterprises and Privileged
Enterprise.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 and Privileged Enterprise.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | e. | Net
operating losses carryforward:
| | -- | ----------------------------------

| | As
of December 31, 2008, 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 $ 17,881, out of which an amount of $ 14,262 can be carried forward
indefinitely. The remainder of the balance can be carried forward for a period up to five
years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Changes
in tax rates in Israel:
| | -- | -------------------------------

| | On
July 25, 2005, the Knesset (Israeli Parliament) approved the Law for the Amendment of the
Income Tax Ordinance (No. 147), 2005, which prescribes, among other provisions, a gradual
decrease in the corporate tax rate in Israel to the following tax rates: in 2006 31%,
in 2007  29%, in 2008  27%, in 2009  26% and in 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:                                 |             
| | Unrealized gains 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 $ 1,794 and $ 1,480 have been included in other           accounts
receivable and prepaid expenses and $ 1,997 and $ 1,852 have been           included
in other assets, as of December 31, 2007 and 2008, respectively           (see Note
4 and Note 8a).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **) | Deferred
tax liabilities of $ 28 have been included in other accrued expenses           and other
liabilities, as of December 31, 2007.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 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: |                        
| | "Approved Enterprise" benefits                      |                        
| | Net operating losses and temporary differences      |                        
| | which are tax exempt or for which valuation         |                        
| | allowance was created                               |                        
| | Subsidiaries with a different tax rate              |                        
| | Change in valuation allowance in respect of         |                        
| | prior years                                         |                        
| | Taxes in respect of prior years                     |                        
| | Others                                              |                        
| |                                                     |                        
| |                                                     |                        
| | Effective tax rate                                  |                        
| |                                                     |                        
| |                                                     |                        
| | 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:
| | -- | -------------------------------------------------------------

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

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

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

| |                                                   | Year ended December 31,
| | ------------------------------------------------- | -----------------------
|
|
|
|
| | Current taxes                                     |                        
| | Change in valuation allowance in respect of prior |                        
| | years                                             |                        
| | Taxes in respect of prior years                   |                        
| | Deferred tax benefit                              |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| | Domestic                                          |                        
| | Foreign                                           |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        

| | k. | Uncertain
tax positions:
| | -- | ------------------------

| | A
reconciliation of the beginning and ending balances of the total amounts of unrecognized
tax benefits is as follows:
| | ----------------------------------------------------------------------------------------------------------------------

| |                                             | 
| | ------------------------------------------- | 
|
|
|
|
| | Balance at January 1, 2008                  | 
| | Increases in tax positions for prior years  | 
| | Decreases in tax positions for prior years  | 
| | Increases in tax positions for current year | 
| |                                             | 
| |                                             | 
| | Balance at December 31, 2008 *)             | 
| |                                             | 
| |                                             | 

| | *) | Out
of the above unrecognized tax benefits an amount of $ 1,251 would result in           a
reduction of the companys effective tax rate, if recognized. The
          unrecognized tax benefits included an immaterial accrued interest as of
December           31, 2008.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Tax
jurisdictions examination years:
| | -- | ------------------------------------

| | Shamir
files income tax returns in multiple tax jurisdictions. Final tax assessments have been
received by the Company up to and including the tax year ended December 31, 2006 and by
certain subsidiaries, for the years between 2003  2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 39

---

---

SHAMIR OPTICAL
INDUSTRY LTD. AND ITS SUBSIDIARIES

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

|NOTE 16: |  | SHAREHOLDERS EQUITY
|-------- | - | --------------------

| | a. | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | 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 Ordinary 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 require the approval of
Shamirs shareholders according to the Israeli Companies Law. 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 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 2006 the Company
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 seven years from the date of grant. The options granted
pursuant to the 2003 Option Plan are exercisable for a period of 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 2004 and 2005 will
vest in four trenches of 25% per year.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 31, 2008 the Companys shareholders approved an amendment to the Companys
2005 General Share and Incentive Plan to provide that in the event that the Company
distributes a cash dividend and the record date for such distribution is subsequent to
the date of grant of an award in the form of an option to purchase shares, but prior to
its exercise or expiration, the exercise price of each such award will be reduced by the
dividend amount per share.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options outstanding as of December 31, 2008, have been separated into exercise price
categories as follows:
| | ---------------------------------------------------------------------------------------------------------------

| |             |  |  |  |           | 
| | ----------- |  |  |  | --------- | 
|
|
|
|
| | 2.46        |  |  |  | 167,105   | 
| | 5.00-7.10   |  |  |  | 276,000   | 
| | 8.35-9.96   |  |  |  | 560,000   | 
| | 10.06-12.19 |  |  |  | 493,771   | 
| | 13.76       |  |  |  | 94,160    | 
| |             |  |  |  |           | 
| |             |  |  |  |           | 
| |             |  |  |  | 1,591,036 | 
| |             |  |  |  |           | 
| |             |  |  |  |           | 

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

| | c. | Modification
of options:
| | -- | ------------------------

| | On
July 31, 2008 the Companys shareholders approved an adjustment to the exercise
price of the outstanding options, including outstanding options previously granted to
directors and external directors in the Company, by reducing the exercise price by
$0.243, the dividend per share declared by the Company in January 2008. As a result,
Shamir recorded an additional compensation cost in the amount of $ 63 in 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Dividend:
| | -- | ---------

| | On
June 27, 2007, Shamir declared a dividend of $ 4,000 ($0.244 per share), which was paid
in July 2007.
| | --------------------------------------------------------------------------------------------------------

| | On
January 14, 2008, Shamir declared a dividend of $ 4,000 ($0.243 per share), which was
paid in February 2008.
| | ---------------------------------------------------------------------------------------------------------------

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

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

| | On
July 19, 2007, the Company entered into a new working service agreement with the Kibbutz
which replaced all former engagements. The terms of the new working service agreement are
substantially similar to the terms of the agreement from February 2005. The agreement
sets 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 the Kibbutz
who provide the services.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 18, 2007, the Kibbutz granted an approval to the Companys subsidiaries,
SSOP and Eyal, to employ directly (i.e. not through the working service agreement)
local members of the Kibbutz.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Manpower
service fees amounted to $ 1,317, $ 1,241 and $ 1,340 for the years ended
December 31, 2006, 2007 and 2008, respectively
| | ---------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company executed 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. 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 the
Company, the fee shall be adjusted accordingly. The fee for catering services is adjusted
continuously based on the actual number of employees using these services.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | On
March 8, 2007, the Companys shareholders approved a new service agreement between
the Kibbutz and SSOP for the period commencing upon the acceptance of the new facility
that was built in the Kibbutz for SSOP and ending on February 9, 2010. The facility was
delivered to SSOP on November 1, 2007. Pursuant to the terms of such agreement, the
Kibbutz provides administrative and maintenance services to SSOP to maintain its
facility. SSOP pays the Kibbutz 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 (5) 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 (5) years, assuming
that the service agreement is extended, based on the actual cost of services in the year
preceding the adjustment date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 19, 2007, following the approval of the Companys shareholders at their special
shareholders meeting, the Company entered into a new additional arrangement with the
Kibbutz. Under the new arrangement between the Company and the Kibbutz, the Company and
its subsidiaries will be entitled to purchase additional services not covered by the
current service agreements, as detailed above. 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 the Company and its subsidiaries during any
calendar year will be no greater than $ 300 (plus VAT, if required by law).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Shamir
paid fees to the Kibbutz pursuant to the service agreement and for other services
amounting to $ 338, $ 466 and $ 573 for the years ended December 31, 2006, 2007
and 2008, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Lease
and sub-lease agreement with the Kibbutz:
| | -- | -----------------------------------------------

| | The
Companys offices, manufacturing, and research and development facilities are
located on the premises of the Kibbutz. The facilities are subleased 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 sublease
agreement, pursuant to which the Kibbutz subleased to the Company the facilities for a
period of 20 years beginning on January 1, 1999. 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 11 months. Rental payments under the amended
agreement are the same as under the prior agreement. The ILA may cancel the lease under
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 - 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.)
|-------- | - | -----------------------------------------

| | On
March 8, 2007, the Company and the Kibbutz enter into a lease agreement pursuant to which
the Company will lease a facility for SSOP from the Kibbutz until November 30, 2023
commencing on the earlier of the: (i) date of occupancy, or (ii) date of the completion
of the construction. On November 1, 2007, such facility was delivered to SSOP by the
Kibbutz. The Company is entitled to terminate the lease at any time; provided, however,
that the Company has located an alternate tenant and the Kibbutz has given its consent,
which consent would not be reasonably withheld. The parcel of land underlying the
facility is included in the long-term lease between the Kibbutz and the 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, and these changes could affect the terms of the lease, and may trigger the
termination of the lease. Under the lease, the Kibbutz is responsible for any expense
resulting from actions of the ILA. The annual rental fees pursuant to the lease are paid
quarterly and in amounts equal to 10% of the actual construction cost of the facility,
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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Rental
payments amounted to $ 301, $ 326 and $ 747 for the years ended December 31,
2006, 2007 and 2008, respectively.
| | ----------------------------------------------------------------------------------------------------------------------

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

| | In
accordance with the Companys sublease agreement with the Kibbutz dated January 5,
1999 (as amended on February 9, 2005), 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 was repaid by December
31, 2008, through deductions of the rental fees the Company pays to the Kibbutz. The loan
bore interest at 1.5% per year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| |                                                         | December 31
| | ------------------------------------------------------- | -----------
|
|
|
|
| | Trade receivables                                       |            
| |                                                         |            
| | Other accounts receivable and prepaid expenses (Note 4) |            
| |                                                         |            
| | Trade payables                                          |            
| |                                                         |            
| | Accrued expenses and other liabilities (Note 11)        |            
| |                                                         |            
| |                                                         |            

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 18: |  | MAJOR CUSTOMER AND 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 presents total revenues and long-lived assets for the years ended December 31,
2006, 2007 and 2008 and as of December 31, 2006, 2007 and 2008, respectively:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |               | 2006 | 2007 | 2008
| | ------------- | ---- | ---- | ----
|
|
|
|
| | Israel        |      |      | $   
| | United States |      |      |     
| | Europe        |      |      |     
| | Asia          |      |      |     
| | Others        |      |      |     
| |               |      |      |     
| |               |      |     
| |               |      |      | $   
| |               |      |      |     
| |               |      |      |     

| | 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 |                        
| |                 |                        
| |                 |                        
| |                 |                        
| |                 |                        

| | c. | Major
customer data as a percentage of total revenues:
| | -- | ------------------------------------------------------

| |            |  |  | 
| | ---------- |  |  | 
|
|
|
|
| | Customer A |  |  | 
| |            |  |  | 
| |            |  |  | 

| | *) | Less
than 10%.
| | -- | --------------

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

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

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 19: |  | SELECTED SUPPLEMENTARY STATEMENTS OF INCOME DATA (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 number of shares        |  |  | 
| |                                          |  |  | 
| |                                          |  | 
| | Effect of dilutive securities:           |  | 
| |                                          |  | 
| | Add - Employee stock options             |  |  | 
| |                                          |  |  | 
| |                                          |  | 
| |                                          |  |  | 
| |                                          |  |  | 
| | Denominator for diluted net earnings per |  | 
| | share - adjusted weighted average shares |  |  | 
| |                                          |  |  | 
| |                                          |  |  | 

| | c. | Allowance
for doubtful accounts:
| | -- | --------------------------------

| | The
changes in the allowance for doubtful accounts for the years ended December 31, 2006,
2007 and 2008 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          |                        
| |                                         |                        
| |                                         |                        

F - 46

---

---

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/ Eyal Hayardeny
Eyal HayardenyChief Executive Officer
| |  | -------------------------------------------------------------------------------------------------------

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

Date: June 18, 2009



---

---

EXHIBIT INDEX

|Exhibit
Number | Description                                                                                                                                                                       
|-------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|1.1            | Articles of Association of Shamir (incorporated by reference to Exhibit 3.1 to our registration statement on
Form S-8 (File 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
Service 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 (English translation)
(incorporated by               reference to Exhibit 4.9 to our annual report on Form
20-F, filed with the SEC on June 26, 2007)
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 | Service
Agreement dated March 8, 2007, between Shamir Special Optical Products Ltd. and Kibbutz
Shamir               (English translation) (incorporated by reference to Exhibit 4.10 to
our annual report on Form 20-F, filed with               the SEC on June 26, 2007).
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 333-137628), filed with the
SEC on September 28, 2006)
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.13* | 2005
General Share and Incentive Plan, as amended
|----- | -------------------------------------------------

|4.14 | Working
Service Agreement dated July 19, 2007, between Shamir and Kibbutz Shamir (English
translation)               (incorporated by reference to Exhibit 4.14 to our annual
report on Form 20-F, filed with the SEC on June 28,               2008)
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.15* | Agreement with Mr. Oppenheimer dated June 30, 2008 (English translation)
|----- | ------------------------------------------------------------------------

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

|11.1 | Code
of Ethics of Shamir (as amended) (incorporated by reference to Exhibit 11 to our annual
report on Form               20-F, filed with the SEC on June 28, 2005, and on March 19,
2009)
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

*
filed herewith.



---

---