---

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As filed with the Securities and Exchange Commission on June 26, 2008


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SECURITIES
AND EXCHANGE COMMISSIONWashington, D.C. 20549


FORM
20-F


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

OR


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

For
the fiscal year ended December 31, 2007


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
  name into English) |  | (Jurisdiction of incorporation
  or organization)

KIBBUTZ SHAMIR
UPPER GALILEE12135 ISRAEL


MR. DAVID BAR-YOSEF, LEGAL COUNSEL & CORPORATE
SECRETARY
TELEPHONE NUMBER: +972-4-6947810; E-MAIL:DAVIDBY@SHAMIR.CO.IL,


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


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 Accounting


| |                   |  |        
| | ----------------- |  | -------
| | Standards Board o |  | Other o

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


Item 17 o     Item
18 o


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


Yes o    No
x


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TABLE
OF CONTENTS

|                           |           |                                                                                |     
|-------------------------- | --------- | ------------------------------------------------------------------------------ | ----
|                          
|                           |           |                                                                                | Page
|                           |           |                                                                                |     
|                          
|CERTAIN DEFINED TERMS      | 1        
|                           |           |                                                                                |     
|FORWARD-LOOKING STATEMENTS | 1        
|                           |           |                                                                                |     
|PART I                    
|                           | 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                                                     | 15  
|                           | ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                      | 28  
|                           | ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND
  PROSPECTS                                 | 29  
|                           | ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND
  EMPLOYEES                                   | 40  
|                           | ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY
  TRANSACTIONS`                           | 48  
|                           | ITEM 8.   | FINANCIAL INFORMATION                                                          | 54  
|                           | ITEM 9.   | THE LISTING                                                                    | 55  
|                           | ITEM 10.  | ADDITIONAL INFORMATION                                                         | 57  
|                           | ITEM 11.  | QUANTITATIVE AND QUALITATIVE
  DISCLOSURES ABOUT MARKET RISK                   | 66  
|                           | ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN
  EQUITY SECURITIES                       | 67  
|                           |           |                                                                                |     
|PART II                    |           |                                                                                |     
|                           | ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND
  DELINQUENCIES                              | 68  
|                           | ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS
  OF SECURITY HOLDERS AND USE OF PROCEEDS | 68  
|                           | ITEM 15T. | CONTROLS AND PROCEDURES                                                        | 69  
|                           | ITEM 16.  | [RESERVED]                                                                     | 70  
|                           | ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                               | 70  
|                           | ITEM 16B. | CODE OF ETHICS                                                                 | 70  
|                           | ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND
  SERVICES                                       | 70  
|                           | ITEM 16D. | EXEMPTIONS FROM THE LISTING
  STANDARDS FOR AUDIT COMMITTEES                   | 70  
|                           | ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY
  THE ISSUER AND AFFILIATED PURCHASERS       | 70  
|                           |           |                                                                                |     
|PART III                   |           |                                                                                |     
|                           | ITEM 17.  | FINANCIAL STATEMENTS                                                           | 71  
|                           | ITEM 18.  | FINANCIAL STATEMENTS                                                           | 71  
|                           | ITEM 19.  | EXHIBITS                                                                       | 71  

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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., in the
following trademarks in various jurisdictions world-wide: Shamir, Shamir logo, Shamir Genesis, Genesis, Shamir
Piccolo,
Piccolo, Shamir Office, Shamir Creation, Shamir Autograph, Autograph, Shamir Attitude,
Attitude, Prescriptor and Eye Point Technology Freeform, Freeform Lenses, Freeform
Technology, Freeform Software
Protocol Panorama, Eye Point, Direct Lens Technology,
Autograph Golf, Autograph
Short, Autograph Everyday, Piccolo Wrap, The Progressive Lens Experts, Titan Hardcoat,
Deskvision, Individual Eyes,
Recreating Perfect Vision,
Multispace, Shamir Nano, Piccolo Nano, Autograph Nano, Studio,  Shamir
Smart Office, Shamir Smart Attitude, Shamir Smart Single Vision, Shamir
Freeform Geometry 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 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.ASELECTED
FINANCIAL DATA

We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the U.S. (U.S. GAAP). The following data has
been derived from our audited consolidated financial statements as of and for
the five years ended December 31, 2003, 2004, 2005, 2006 and 2007, which have
been audited by Kost, Forer, Gabay & Kasierer, an independent registered
public accounting firm and a member firm of Ernst & Young Global. Our
audited consolidated balance sheets as of December 31, 2006 and 2007, and the
related audited consolidated statements of income and of cash flows for each of
the three years ended December 31, 2005, 2006 and 2007, together with the notes
thereto, appear elsewhere in this annual report.

2

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---

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

|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|----------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | ---- | ------ | ---- | - | ------ | - | - | ------- | -
|                                                                  |  | Year Ended December 31, |       
|                                                                  |  | 2003                    |        | 2004 |   | 2005   |   | 2006 |        | 2007 |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |  
|(Dollars
  in thousands, except per share data)                   |  |                         |        |      |   |        |   |      |        |      |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |  
|STATEMENT
  OF OPERATIONS DATA:                                   |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Revenues, net                                                     |  | $                       | 60,079 |      | $ | 71,269 |   | $    | 80,364 |      | $ | 97,280 |   | $ | 120,419 |  
|Cost of revenues(1)                                               |  |                         | 29,955 |      |   | 33,414 |   |      | 36,030 |      |   | 44,038 |   |   | 55,856  |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Gross profit                                                      |  |                         | 30,124 |      |   | 37,855 |   |      | 44,334 |      |   | 53,242 |   |   | 64,563  |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Operating
  expenses:                                             |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Research and
  development(1)                                     |  |                         | 3,797  |      |   | 1,842  |   |      | 1,688  |      |   | 2,372  |   |   | 2,564   |  
|Selling and
  marketing(1)                                        |  |                         | 13,756 |      |   | 18,915 |   |      | 23,663 |      |   | 32,798 |   |   | 36,552  |  
|General and
  administrative(1)                                   |  |                         | 3,564  |      |   | 4,571  |   |      | 6,887  |      |   | 10,986 |   |   | 13,549  |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Total operating
  expenses                                        |  |                         | 21,117 |      |   | 25,328 |   |      | 32,238 |      |   | 46,156 |   |   | 52,665  |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Operating income                                                  |  |                         | 9,007  |      |   | 12,527 |   |      | 12,096 |      |   | 7,086  |   |   | 11,898  |  
|Financial income
  (expenses) and other, net                      |  |                         | (1,064 | )    |   | (864   | ) |      | 401    |      |   | (159   | ) |   | (239    | )
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Income before
  taxes on income                                   |  |                         | 7,943  |      |   | 11,663 |   |      | 12,497 |      |   | 6,927  |   |   | 11,659  |  
|Taxes on income                                                   |  |                         | 1,095  |      |   | 1,549  |   |      | 4,504  |      |   | 2,179  |   |   | 5,013   |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Income after
  taxes on income                                    |  |                         | 6,848  |      |   | 10,114 |   |      | 7,993  |      |   | 4,748  |   |   | 6,646   |  
|Equity in gain
  (losses) of affiliates, net                      |  |                         | (47    | )    |   | (48    | ) |      |       |      |   | (245   | ) |   | 46      |  
|Minority interest
  in losses (earnings) of subsidiaries          |  |                         | (1,564 | )    |   | (1,254 | ) |      | 112    |      |   | 1,957  |   |   | 1,509   |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Net income                                                        |  | $                       | 5,237  |      | $ | 8,812  |   | $    | 8,105  |      | $ | 6,460  |   | $ | 8,201   |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Pro forma data
  (unaudited)(2):                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Pro forma-additional
  taxes on income                            |  | $                       | 1,187  |      | $ | 1,707  |   |      |        |      |   |        |   |   |         |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Pro forma net
  income(2)                                         |  | $                       | 4,050  |      | $ | 7,105  |   |      |        |      |   |        |   |   |         |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Net earnings per
  share:                                         |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Basic                                                             |  | $                       | 0.43   |      | $ | 0.70   |   | $    | 0.52   |      | $ | 0.40   |   | $ | 0.50    |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Diluted                                                           |  | $                       | 0.43   |      | $ | 0.68   |   | $    | 0.51   |      | $ | 0.39   |   | $ | 0.50    |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Pro forma
  earnings per share (unaudited)(2) :                   |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Basic                                                             |  | $                       | 0.34   |      | $ | 0.56   |   |      |        |      |   |        |   |   |         |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Diluted                                                           |  | $                       | 0.33   |      | $ | 0.55   |   |      |        |      |   |        |   |   |         |  
|                                                                  |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Weighted average
  number of shares (in thousands)                |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Basic                                                             |  |                         | 12,048 |      |   | 12,625 |   |      | 15,449 |      |   | 16,257 |   |   | 16,339  |  
|Diluted                                                           |  |                         | 12,133 |      |   | 12,961 |   |      | 15,869 |      |   | 16,548 |   |   | 16,552  |  
|Weighted average
  shares used for pro forma (in thousands) (2) : |  |                         |        |      |   |        |   |      |        |      |   |        |   |   |         |  
|Basic                                                             |  |                         | 12,419 |      |   | 12,625 |   |      |        |      |   |        |   |   |         |  
|Diluted                                                           |  |                         | 12,505 |      |   | 12,961 |   |      |        |      |   |        |   |   |         |  

|                           |  |                    |        |      |   |        |  |      |         |      |   |         |   |   |         | 
|-------------------------- |  | ------------------ | ------ | ---- | - | ------ |  | ---- | ------- | ---- | - | ------- | - | - | ------- | 
|                           |  | As of December 31, |       
|                           |  |                    |       
|                           |  | 2003               |        | 2004 |   | 2005   |  | 2006 |         | 2007 |  
|                           |  |                    |        |      |   |        |  |      |         |      |  
|(Dollars
  in thousands)   |  |                    |        |      |   |        |  |      |         |      |   |         |   |   |         | 
|                           |  |                    |        |      |   |        |  |      |         |      |   |         |   |   |         | 
|FINANCIAL POSITION DATA:   |  |                    |        |      |   |        |  |      |         |      |   |         |   |   |         | 
|Cash and cash equivalents  |  | $                  | 6,033  |      | $ | 6,235  |  | $    | 27,502  |      | $ | 23,205  |   | $ | 18,953  | 
|Short term investment      |  |                    |       |      |   |       |  |      | 14,474  |      |   | 16,911  |   |   | 14,375  | 
|Working capital            |  |                    | 10,035 |      |   | 8,256  |  |      | 54,671  |      |   | 59,028  | * |   | 52,316  | 
|Total assets               |  |                    | 52,922 |      |   | 65,344 |  |      | 116,661 |      |   | 146,996 |   |   | 160,491 | 
|Total liabilities          |  |                    | 34,560 |      |   | 43,146 |  |      | 41,697  |      |   | 64,970  |   |   | 74,468  | 
|Temporary equity(3)        |  |                    |       |      |   | 3,000  |  |      |        |      |   |        |   |   |        | 
|Total debt                 |  |                    | 19,649 |      |   | 23,020 |  |      | 21,487  |      |   | 40,381  |   |   | 45,433  | 
|Total shareholders equity |  |                    | 14,945 |      |   | 14,630 |  |      | 71,388  |      |   | 79,803  |   |   | 85,223  | 

|    |                                                                      
|--- | ---------------------------------------------------------------------
|   
|(1) | Operating expenses includes the following
  stock-based compensation:

|                           |  |                         |       |      |   |      |  |      |     |      |   |       |  |   |       | 
|-------------------------- |  | ----------------------- | ----- | ---- | - | ---- |  | ---- | --- | ---- | - | ----- |  | - | ----- | 
|                           |  | Year Ended December 31, |      
|                           |  |                         |      
|                           |  | 2003                    |       | 2004 |   | 2005 |  | 2006 |     | 2007 |  
|                           |  |                         |       |      |   |      |  |      |     |      |  
|(Dollars
  in thousands)   |  |                         |       |      |   |      |  |      |     |      |   |       |  |   |       | 
|                           |  |                         |       |      |   |      |  |      |     |      |   |       |  |   |       | 
|Cost of revenues           |  |                         |      |      |   |     |  |      |    |      |   |      |  | $ | 23    | 
|Research and development   |  |                         | 1,809 |      |   |     |  |      |    |      |   | 247   |  |   | 226   | 
|Selling and marketing      |  |                         |      |      |   | 13   |  |      | 343 |      |   | 260   |  |   | 86    | 
|General and administrative |  |                         |      |      |   | 69   |  |      | 265 |      |   | 919   |  |   | 695   | 
|                           |  |                         |       |      |   |      |  |      |     |      |   |       |  |   |       | 
|Total                      |  | $                       | 1,809 |      | $ | 82   |  | $    | 608 |      | $ | 1,426 |  | $ | 1,030 | 
|                           |  |                         |       |      |   |      |  |      |     |      |   |       |  |   |       | 

|                                                                                     | 
|------------------------------------------------------------------------------------ | 
|                                                                                    
|1This
amount was re-classified  see Note 2(u) to our attached financial statements.

3

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---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 |  | 2003  |  | 2004  |  | 2005  |  | 2006  |  | 2007 
|         |  |       |  |       |  |       |  |       |  |      
|         |  |       |  |       |  |       |  |       |  |      
|EUR      |  | 0.860 |  | 0.794 |  | 0.804 |  | 0.797 |  | 0.730
|NIS      |  | 4.548 |  | 4.482 |  | 4.488 |  | 4.457 |  | 4.108

On
June 15, 2008, the exchange rate was NIS 3.422 per $1.00 and  0.65 per $1.00,
as reported by the Bank of Israel.

3.BCAPITALIZATION
AND INDEBTEDNESS

Not applicable

3.C REASONS FOR THE OFFER AND USE OF
PROCEEDS

Not applicable.

3.DRISK 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.

4

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---

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

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

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

The
U.S. ophthalmic market is characterized by a large number of laboratories,
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 manufactures 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 as well
as through independent laboratories. There is a risk that we may lose some of
our existing customers and that our sales to European independent laboratories
will decrease if there is consolidation among laboratories in Europe.

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 2007, we generated
approximately 68.0% of our revenues from sales outside of Israel and the United
States, including 52.5% 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 and
  South America, that have an adverse effect on our operations in those
  countries, including the fact that customers in some jurisdictions may not do
  business with an Israeli company;
|  |                                                                                                                                                                                                                                                                                                      
|· | the imposition of tariffs or
  exchange controls, technology export license requirements or other trade
  restrictions;                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                      
|· | difficulty in managing a large
  organization spread through various countries, including staffing and
  managing foreign operations;                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                      
|· | difficulty enforcing agreements
  and collecting receivables through certain foreign legal systems, in
  particular in developing markets in Asia and South America;                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                      
|· | longer payment cycles for
  foreign customers than for customers in the United States;                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                      
|· | currency exchange risks, in
  particular between the U.S. dollar and local foreign currencies;                                                                                                                                                                                                       

5

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|  |                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|· | 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;
|  |                                                                                                                                                       
|· | greater difficulty in
  safeguarding intellectual property in certain jurisdictions, in particular in
  China and other Asian countries; and          
|  |                                                                                                                                                       
|· | difficulties in adapting our
  products to different country-specific requirements.                                                                   

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

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 U.S. dollars,
and we incur a significant portion of our expenses, principally salaries and
related expenses of our staff in Israel, in NIS. In 2007 we generated
approximately 43% of our revenues in U.S. dollars and 46% in Euros, and we
incurred approximately 16% of our operating expenses in NIS, 32% in U.S.
dollars and 42% in Euros. Exchange rate fluctuations between the U.S. dollar
and the Euro and between the U.S. 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
U.S. 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. In 2006 and 2007, the NIS appreciated against the U.S. dollar by 8.2%
and 9.0% respectively, and the Euro appreciated against the U.S. dollar by
10.2% and 10.5%, respectively, which had an adverse effect on our results of
operations.

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.

Our revenues will decline significantly if there is a
worldwide economic slowdown.

We
conduct our operations in Israel and throughout the world, including Europe and
in North America. In 2007, our sales to customers in Europe constituted
approximately 52.5% of our revenues, while our sales to customers in the U.S.
constituted approximately 30.5% 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.

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.                                

6

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---

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 at or damage to any of these
facilities, whether as a result of fire, natural disaster, act of war, terrorist attack or
otherwise, could materially affect our ability to deliver products on a timely basis and
could materially adversely affect our results of operations. We have insured the portion
of our product inventories stored in these facilities against loss from any such
disruption or damage. For risks relating to our facilities in Israel, see also
Risks Relating to our Operations in Israel.

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

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

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

|  |                                                                                                                      
|- | ---------------------------------------------------------------------------------------------------------------------
|· | patent authorities will not
  grant patents based on applications our competitors have filed or may file;            
|  |                                                                                                                      
|· | the scope of any patent
  protection we receive will exclude competitors or provide us with competitive
  advantages;
|  |                                                                                                                      
|· | any of the patents that have
  been or may be issued to us will be held valid if subsequently challenged; or         
|  |                                                                                                                      
|· | others will not claim rights in
  or ownership of the patents and other proprietary rights that we hold,             

Furthermore,
we cannot assure 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.

7

---

---

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.

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 adversely affect our results.

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

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

8

---

---

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 (such as
intellectual property). Likewise, we may write off in-process research and
development that we no longer wish to continue to fund. Any of these factors
could harm our business, financial condition and results of operations.

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

We rely on
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
significantly to our sales and profitability. The consent of certain minorities
in certain subsidiaries is required for certain matters regarding the
subsidiaries operations, including resolutions that contradict specific
existing agreements, issuances of shares, and transactions with related parties
(including us) or other transactions outside the ordinary course of business.
Dividends and other payments to us from subsidiaries in certain jurisdictions
are subject to legal restrictions and may have adverse tax consequences to us.
In addition, these payments or loans are contingent on the results of
operations of the particular subsidiaries and are subject to various business
considerations. For example, we own 51% of Altra Trading GmbH (Altra), our
German distributor and holding company through which we hold our European
subsidiaries. Sales through Altra accounted for approximately 56.4% of our
total sales in 2007.

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

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

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

We have
four large customers that collectively accounted for approximately 26.9% of our
revenues during 2007. In addition, our largest customer accounted for
approximately 10% of our revenues during 2007. The remaining 73.1% of our
revenues are spread across a large number of customers in various geographic
locations, and no other customer, other than our four largest customers,
accounted for more than 5.0% 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.

9

---

---

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

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

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

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

|  |                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------
|· | 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.

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.

10

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Risks Related to Our
Relationship with Kibbutz Shamir

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

As of June
15, 2008, our majority shareholder, Kibbutz Shamir, holds approximately 59.04%
of our outstanding shares. As a result, this single shareholder has sufficient
voting power to effectively control all matters concerning our company that
require shareholder approval. For example, Kibbutz Shamir may have the power to
affect our legal and capital structure; to elect all of our directors; to
prevent or effect changes in our control or management; to approve or reject
changes to our operations or strategic direction; to amend our Articles of
Association and change the rights attached to our shares; and to determine
whether we may enter into mergers or other business combination transactions in
which shareholders could receive a premium over the prevailing market price for
our shares. Kibbutz Shamir has contractually agreed with another shareholder to
vote for that shareholders nominee for membership on our board. See  Item 7.
Major Shareholders and Related Party Transactions.

In
addition, we have entered into certain agreements with Kibbutz Shamir pursuant to
which Kibbutz Shamir provides us with, among other things, facilities, workers
to fill certain positions within our company, administrative services, the
operation and administration of our information systems operations, security
and facilities maintenance, and other services. For more information please see
Item 7. 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.

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 officers are
members of Kibbutz Shamir and members of Kibbutz Shamirs management board. The
chairman of our board of directors is also the chairman of the management board
of Kibbutz Shamir. In addition, another member of our board of directors, who
is not a member of Kibbutz Shamir, also serves on the management board of
Kibbutz Shamir. See Item 6. Directors, Senior Management and Employees.

Risks Related to Our
Shares

The
trading price of our shares may fluctuate substantially.

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

|  |                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | the gain or loss of significant orders or customers;                                                                                                            
|  |                                                                                                                                                                 
|· | actual or anticipated variations in our operating results or a
  variance in our financial performance from the expectations of market
  analysts;              
|  |                                                                                                                                                                 
|· | announcements of technological innovations, new products or product
  enhancements, strategic alliances or significant agreements by us or by our
  competitors;
|  |                                                                                                                                                                 
|· | conditions and trends in the end markets we serve and changes in the
  estimates of the sizes and growth rates of these markets;                                
|  |                                                                                                                                                                 
|· | recruitment or departure of key personnel;                                                                                                                      

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|  |                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|· | 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.

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 70.93% of our outstanding
shares as of June 15, 2008. 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.

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.

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Risks Relating to Our
Operations in Israel

Conducting
business in Israel entails special risks.

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

|  |                                                                                               
|- | ----------------------------------------------------------------------------------------------
|· | any major hostilities involving Israel;                                                       
|  |                                                                                               
|· | a full or partial mobilization of the reserve forces of the Israeli
  army;                   
|  |                                                                                               
|· | the interruption or curtailment of trade between Israel and its
  present trading partners; or
|  |                                                                                               
|· | a significant downturn in the economic or financial condition of
  Israel.                    

Since the
establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors, and a state of hostility,
varying from time to time in intensity and degree, has led to security and
economic problems for Israel. Most recently, in the summer of 2006, for
approximately one month, battles took place between the Israeli military and
Lebanese guerilla units, and our
northern facilities suffered certain damages for which we were not fully
reimbursed. Further, the establishment of a Hamas government in Gaza has
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.

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.

13

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

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

Additionally,
it may be difficult for investors to assert U.S. federal securities laws claims
or to enforce civil liabilities under U.S. federal securities laws in actions
originally instituted in Israel.

14

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ITEM 4. INFORMATION ON THE COMPANY

4.AHISTORY 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 Altra and an additional 1% of Eyal to
give us control of Eyal. In November 2003 we acquired an additional 47% of
Eyal, and in May 2004 we acquired the remaining 2% of Eyals shares. In July
2004 we purchased Interoptic S.A.R.L., a local French distributor, through
Altra. In September 2004 we purchased through Altra the Cambridge Optical
Group, through which we hold Shamir UK Limited, an optical laboratory in the
United Kingdom.

In
March 2005, we conducted an IPO and concurrent listing on the NASDAQ National
Market (currently known as NASDAQ Global Market) of our ordinary shares. Our
ordinary shares have also been listed on the Tel Aviv Stock Exchange since May
2, 2005. Prior to the IPO, we were organized as an agricultural
co-operative society (A.C.S.), which is a corporate entity organized under
Israeli law with shares and limited liability for its members. The principal
distinction between an Israeli corporation, our current corporate form, and an
A.C.S. is that an A.C.S. is a pass-through tax entity and all the profits and
losses of the A.C.S. are attributed to its shareholders pro rata to their
shareholding. Historically, the Articles of Association of our A.C.S. reflected
the laws and regulations applicable to such an entity.

On
March 6, 2005, we changed the structure of our company from an A.C.S. into an
Israeli corporation. To do so, we relied on a provision of the Israeli
Companies Law that allows such reorganization without having to transfer any
assets, rights or liabilities into a new entity and by using the same entity of
the A.C.S. in order to change its form into a corporation, which is not
considered as a taxable event.

On
June 27, 2005, Altra established a laboratory facility in Turkey, 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, Altra 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).

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 19, 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.

15

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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.

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.

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 segments, including frames,
spectacle lenses, contact lenses and optical accessories. The spectacle lens
segment makes up the largest portion of this market. For a breakdown of our
total revenues by category of activity and geographic market, see Item 5.
Operating and Financial Review and Prospects Operating Results.

Lenses and Alternatives

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

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | Single Vision
  Lenses.Single vision
  lenses have only one optical power and are primarily used to correct
  deficiencies in either near or distant vision. As they are essentially simple
  magnifying glasses when used to treat near-sightedness, single vision lenses
  tend to be cheaper than other types of lenses and are readily available in
  most markets in the world.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|· | Bifocal
  Lenses.Bifocal lenses
  have two optical powers and are used to correct deficiencies in both near and
  distant vision. The surface of the bifocal lens is typically divided into two
  parts, the upper portion for distant vision and part of the lower portion for
  near vision. The division between the two parts of the lens is clearly
  visible and forces the eyes to make an abrupt transition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|· | Progressive
  Lenses.Progressive
  lenses utilize complex designs to combine several optical powers for
  different viewing distances, with the optical power gradually increasing from
  the upper portion of the lens to the lower portion of the lens. The
  transition between powers is gradual and seamless, thereby eliminating distracting
  lines between the different vision areas and allowing the user to see at
  various distances without an image jump, restrictive focal lengths or
  demarcation lines, although some users have difficulty adapting to the
  distortion areas of progressive lenses. Progressive lenses are
  generally the most expensive type of lenses and are less frequently covered
  by insurance than single vision or bifocal lenses. Progressive lenses are
  used to treat Presbyopia, a vision condition where the crystalline lens of
  the eye loses its flexibility and the eye muscles become less powerful
  causing the eye to lose its ability to focus on close objects. Presbyopia is
  part of the normal aging process and develops gradually over an extended
  period of time and affects almost everyone over the age of 45, regardless of
  whether they have previously had normal vision or have suffered from myopia,
  astigmatism or other vision conditions. Presbyopia is a degenerative
  condition that worsens and often requires progressively stronger lenses over
  time. Presbyopia cannot currently be cured but is treated with lenses that
  generate optical power assisting the eye to focus on both close and distant
  objects.

16

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

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

Market Growth

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

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | Increased
  Awareness. Over the past
  few years, there has been an increasing number of advertising, marketing,
  promotional and educational programs supported by progressive lens
  manufacturers and optical chains to increase public awareness of progressive
  lenses and their advantages. We expect the progressive lens market to
  continue to benefit from these programs.                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|· | Shift From
  Bifocal Lenses.
  Progressive lenses will continue to benefit from the shift in demand away
  from bifocal lenses to progressive lenses as a superior treatment for
  Presbyopia. As technologies evolve and more people begin to require treatment
  for Presbyopia, we expect that the market shift from bifocal to progressive
  lenses will accelerate.                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|· | Favorable
  Demographic Trends.
  Multifocal lenses, which include bifocal and progressive lenses, are
  currently the most satisfactory treatments for Presbyopia. Because Presbyopia
  generally becomes symptomatic for individuals in their early forties, the
  primary market for progressive lenses is people over the age of 45. We expect
  that the U.S. population over the age of 45 will grow.                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|· | Advancements
  in Lens Technologies.
  Over the past decade, there have been significant technological advances in
  lens quality due to the development of design and manufacturing processes,
  anti-reflective coatings, improved raw materials and other factors. We
  believe that the continuous introduction of improved technology will also
  encourage customers to upgrade and replace their lenses.                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|· | Fashion
  Trends. Leading
  companies in fashion, cosmetics and athletics are promoting multiple
  spectacle frames of different styles for different activities. We believe
  this trend will result in increased purchases of spectacles, as
  fashion-conscious customers will choose a different frame for each specific
  activity. In addition, we believe that these customers will prefer
  progressive to bifocal lenses for the lack of visible lines marking the shift
  in prescription strengths.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|· | Maturing of
  New Markets. We believe
  that currently approximately half of all people suffering from Presbyopia are
  left untreated. A significant part of these potential customers reside in
  China and India. We believe that, as these countries develop and health care
  becomes more readily accessible, the demand for progressive lenses as a
  solution to Presbyopia will expand as well.                                                                                                      

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

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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 of spectacle lenses. Our main competitors
include Essilor, Zeiss (merged with Sola), Hoya and Rodenstock for the
production and marketing of 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 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 2007. We also
believe that providing 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 created two separate distribution strategies for our two principal
markets, the United States and Europe, which are specifically tailored to our
target customers in each market. Our sales via Altra, mainly in Europe,
accounted for $67.9 million, or 56.4%, of our revenues in 2007, and sales in
the United States, via Shamir Insight, accounted for $24.3 million, or 20.2% during
the same period.

In
Europe, we sell our products directly to retail optical shops through our
vertically integrated optical laboratories in Portugal, Turkey and the United
Kingdom, as well as through our distribution centers in Spain, France and
Germany.

In
the United States, 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 from approximately $8.7 million
in 2003 to approximately $24.3 million in 2007, representing a compound annual
growth rate of 29.3%.

Ability to Leverage Resources

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

In
addition, we believe that the implementation of our Freeform Technology and the
ability of optical laboratories to produce custom-made progressive lenses to
specification, using our innovative software and based on our mathematical
algorithms, have the potential to increase our revenues significantly and to
enhance our financial results. As laboratories adopt the Freeform Technology
and 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, 2008.
Kibbutz Shamir was founded in 1944 and is a small communal society of
approximately 300 members, including approximately 52 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.

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.

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Capitalize on Positive Demographic Trends
and Increase Penetration

Given
our strategic focus on progressive lenses, we believe that we are well
positioned to benefit from the positive demographic trends in developed
countries and the increased penetration of progressive lenses in developed and
developing regions. Because Presbyopia is an age-related process that affects
almost all individuals above the age of 45, 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 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.

Implement New Approach of Designing and
Manufacturing Personal Lenses

We
were among the first progressive lens manufacturers to provide optical
laboratories with a newly developed Freeform production method. Our Freeform
production method, known as our Direct Lens Technology, is an advanced
surfacing technology for creating premium lenses customized for the unique
needs of each patient. By combining the patients exact vision requirements
with our proprietary Eye Point Technology, a personal file for a customized
progressive lens is created and transferred to advanced cutting and polishing
machinery for production. Although we do not expect revenues from the Freeform
Technology to be material in the near future, we believe that over time
Freeform production methods will redefine the traditional ophthalmic business model
on an industry-wide basis. We are currently utilizing our Direct Lens
Technology in the optical laboratories of several customers, 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. While lenses produced from these materials currently represent only a
small portion of the total market, we believe that they represent the fastest
growing segment for progressive lenses and provide enhanced profit margins. We
believe this strategy will improve the performance of our products and generate
increased sales.

Operations and Principal Activities

Products

Our
products consist of lenses that we sell to optical laboratories and opticians,
and design services, including molds, which we sell to optical lens
manufacturers under service and royalty agreements. During the year 2007,
revenues from our sales of lenses accounted for 94.6% of our total revenues,
while revenues from our sales of design services and other sources accounted
for 5.4% of our total revenues.

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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. 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 ft. Allows comfort for people working in closed
  environments. |  | Plastic, Glass, Polycarbonate 
|                 |  |                                                                                                                  |  |                               
|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. Produced using Freeform Technology.                                  |  | Plastic Polycarbonate         
|                 |  |                                                                                                                  |  |                               
|Shamir Smart     |  | Customized back surface
  aspheric single vision lens. Produced using Freeform Technology.                       |  | Plastic, Trivex, Polycarbonate

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.

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 45 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.

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

Research and Development Teams

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

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

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

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

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

Proprietary Technologies

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

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

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

Marketing and Distribution

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

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Lenses

Our
marketing strategy in the United States differs from our marketing strategy in
Europe and the rest of the world. In the United States it is a customary
practice for optical shops to determine for their patients the type of lens to
be generated whereas in Europe and the rest of the world the optical laboratories
generally make such determinations. Therefore, marketing 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.

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
subsidiary Altra. Altra relies on two primary distribution channels. The first
channel is comprised of Altras 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. 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 25.8% 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.

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 2007 our four largest customers collectively
accounted for 26.9% of our revenues. Our largest customer accounted for approximately
10% of our revenues during 2007. The remaining 73.1% of our revenues are spread
across a large number of customers in various geographic locations, and no
other customer, other than our four largest customers, accounted for more than
5.0% of our revenues.

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Manufacturing Operations

We
operate manufacturing and research and development facilities in Kibbutz Shamir
in northern Israel and a manufacturing facility in Kibbutz Eyal in central
Israel. These facilities produce glass molds and semi-finished glass and
plastic lenses. We also produce finished glass and plastic lenses at our
optical laboratories in Portugal and Turkey. Recently, our subsidiary SSOP has
begun to manufacture finished lenses and semi finished polycarbonate lenses at
our new facility in Kibbutz Shamir.

Raw Materials

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

Production of Semi-Finished Plastic Lenses

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

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

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

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

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

Production of 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.

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.

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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.

Freeform Lens Calculation Software, Writing
and Distributing

Our
software team, which is part of the R&D team, is writing a Freeform lens
calculation software that computes a surface for processing a Freeform lens.
The software gets as an input the prescription of lens as ordered by the
optometrist as well as the frame shape that the customer selected. The software
computes a file that represents the surface that needs to be formed on the lens
and transfer it to a Freeform manufacturing line. A lens having the exact
prescription and optimal optical and geometrical characteristics is produced by
the Freeform line, using this file. We installed and keep installing this
software at our 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, 2007, 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
subsidiary Inray Ltd., covering various aspects of our innovative algorithms,
devices, and methods of designing multifocal surfaces.

We
own rights directly or through our subsidiary Shamir Insight Inc., in the
following trademarks in various jurisdictions world-wide: Shamir, Shamir logo, Shamir Genesis, Genesis,
Shamir Piccolo, Piccolo, Shamir Office,
Shamir Creation, Shamir Autograph, Autograph,
Shamir Attitude, Attitude, Prescriptor, Eye
Point Technology Freeform, Freeform Lenses, Freeform
Technology, Freeform Software Protocol Panorama, Eye
Point, Direct Lens Technology, Autograph Golf,
Autograph Short, Autograph Everyday, Piccolo Wrap, The
Progressive Lens Experts, Titan
Hardcoat, Deskvision,
Individual Eyes, Recreating Perfect Vision, Multispace, Nano, Piccolo Nano,
Autograph Nano, Studio, Shamir Smart Office, Shamir Smart Attitude,
Shamir Smart Single Vision, Shamir Freeform Geometry 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.

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

25

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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.

4.CORGANIZATIONAL
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
 Shamir Or Ltd.
 K. Shamir, Is.
 100%
 Shamir USA
 Agora Hills, CA
 100%
 Shamir Israel Optical  Marketing Ltd.
 K. Shamir, Is.
 100%
 Shamir Insight, Inc.
 San Diego, CA
 100%
 Eyal Optical Ind. Ltd.
 K. Eyal, Is.
 100%
 Shamir Special Optical Products Ltd.
 K. Shamir, Is.
 100%
 Altra Trading GmbH
 Niederau, Ger.
 51%
 Spherical Optics (Pty) Ltd.
 Joh., South Africa
 51%
 Centro Integral Optico  S.A. de C.V.
 Mexico City, Mex.
 51%
 Shalens S.A. C.V.
 Mexico City, Mex.
 51%
 Inray Ltd.
 K. Shamir, Is.
 50%
 (1)
 Siam Optical
 Technology
 Company Ltd.
 Bangkok, Thailand
 25.8%
 e-Vision LLC
 Roanoke, VA
 17.78%
 Altra Optik Sanayi ve  Ticaret A.S.
 Istanbul, Turkey
 100%
 Interoptic SARL
 Paris, France
 100%
 Shamir Optical Espana, SL
 Madrid, Spain
 100%
 Shamir Portugal, LDA
 Vilar, Portugal
 100%
 Shamir UK Limited
 Cambridge, UK
 100%
 Shamir France SARL
 Paris, France
 100%


26

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|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|   
|    |                                                                                          
|(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.                                                                                                                                                           
|  |                                                                                                                                                                                                                                             
|· | Altra Trading GmbH is a
  distribution company and our holding company in Europe. We hold 51% ownership
  of Altra Trading 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
  partly owned subsidiary PixelOptics, Inc., is exploring the use of
  electroactive technologies to create lenses that can change refractive powers
  to allow users to focus their vision at varying distances.
|  |                                                                                                                                                                                                                                             
|· | Interoptic S.A.R.L. is one of
  our distributors in France.                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                             
|· | Shamir Optical Espana, S.L. is
  our distributor in Spain.                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                             
|· | Altra Optik Sanayi ve Ticaret
  A.S. is our laboratory facility and distributor in Turkey.                                                                                                                                                  
|  |                                                                                                                                                                                                                                             
|· | Shamir France S.A.R.L. is one
  of our distributors in France.                                                                                                                                                                              
|  |                                                                                                                                                                                                                                             
|· | Spherical Optics (PTY) Ltd. is
  our local distributor in South Africa.                                                                                                                                                                     
|  |                                                                                                                                                                                                                                             
|· | Shamir Portugal, LDA. is our
  optical laboratory and distributor in Portugal, which also serves our
  European subsidiaries.                                                                                                               
|  |                                                                                                                                                                                                                                             
|· | Shamir UK Limited is our
  optical laboratory and distributor in the United Kingdom.                                                                                                                                                        
|  |                                                                                                                                                                                                                                             
|· | Shamir Special Optical Products
  Ltd. is an optical laboratory and a manufacturer of semi finished
  polycarbonate lenses located in Kibbutz Shamir.                                                                                       
|  |                                                                                                                                                                                                                                             
|· | 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.DPROPERTIES, 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 cover approximately 17,483 square meters of manufacturing,
warehouses and office space.

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We
also own optical laboratories in Portugal, Turkey, Mexico and the United
Kingdom, which occupy approximately 4,000 square meters, 1,496 square meters,
1,718 square meters and 1,001 square meters of owned and leased manufacturing
and office space, respectively. Our partially owned distributors in France, Germany,
Spain 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
|                           |  |                                        |  |                                               |  |                |  |             
|                           |  |                                        |  |                                               |  | (in sq meters) |  |             
|                           |  |                                        |  |                                               |  |                |  |             
|Kibbutz Shamir, Israel     |  | Shamir Optical Industry Ltd.           |  | Headquarters; Administration;
  Manufacturing |  | 4,786          |  | Leased      
|                           |  |                                        |  |                                               |  |                |  |             
|Kibbutz
  Eyal, Israel     |  | Eyal Optical Industries (95)
  Ltd.    |  | Manufacturing; Distribution
  warehouse       |  | 3,997          |  | Leased      
|                           |  |                                        |  |                                               |  |                |  |             
|Kibbutz Shamir, Israel     |  | Shamir Special Optical Products
  Ltd. |  | Optical laboratory;
  Manufacturing           |  | 8,700          |  | Leased      
|                           |  |                                        |  |                                               |  |                |  |             
|Vilar, Portugal            |  | Shamir Portugal, LDA                   |  | Optical laboratory,
  Distribution            |  | 4,000          |  | Owned       
|                           |  |                                        |  |                                               |  |                |  |             
|Madrid,
  Spain            |  | Shamir
  Optical Espana S.L.           |  | Distribution                                  |  | 570            |  | Leased      
|                           |  |                                        |  |                                               |  |                |  |             
|Paris,
  France            |  | Shamir
  France S.A.R.L.               |  | Distribution                                  |  | 5,782          |  | Leased      
|                           |  |                                        |  |                                               |  |                |  |             
|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        |  | Altra
  Trading GmbH                   |  | Administration; Distribution
  warehouse      |  | 2,198          |  | Owned       
|                           |  |                                        |  |                                               |  |                |  |             
|Cambridge, United Kingdom  |  | Shamir UK Limited                      |  | Optical laboratory,
  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            |  | 1,718          |  | Leased      
|                           |  |                                        |  |                                               |  |                |  |             
|Johannesburg, South Africa |  | Spherical Optics (Pty) Ltd.            |  | Distribution                                  |  | 450            |  | Leased      

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

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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. See Item 3. Key Information 
Corporate Reorganization. As the A.C.S. was a pass-through tax entity, the tax
liability in respect of our operations was not charged to the company but to
the owners, pro rata to their holding in the A.C.S. For comparison purposes, we
have included in the selected consolidated financial data in this annual report
our pro forma net income, which reflects income taxes we would have paid during
the historical periods presented, assuming we had been a tax-paying corporation
during that time.

5.AOPERATING RESULTS

Functional Currency and Exchange Rate Fluctuations

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

The
functional currency of Altra and most of its subsidiaries, is the Euro.
Accordingly, Altras assets and liabilities are translated at the year-end
exchange rate, and statement of income items are translated at the average
exchange rate during the reported period.

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.  In 2006 and 2007, the NIS
appreciated against the U.S. dollar by 8.2% and 9.0% respectively, and the Euro
appreciated against the U.S. dollar by 10.2% and 10.5%, respectively, which had
an adverse effect on our results of operations.

29

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Revenues, Net

We
generate revenues both from selling lenses to laboratories and opticians and
from providing design services to third party manufacturers. Our lenses are
sold primarily under Shamir brands through distributors, including our
majority-owned subsidiaries. Design services are provided under contracts with
other lens manufacturers and include research and development services,
production of molds for lenses, and royalties from the sale of lenses made
utilizing our designs. In the last  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 2003 to
2007, revenues from the sale of lenses increased by approximately 21.2% annually
while revenues from design services did not undergo significant change. We
generate revenue mainly in the period between the beginning of the project and
the completion of the main prototype. Following this completion, there is a
period during which we receive only limited revenue, if any, from adjustments
and improvements to the prototype. Upon commencement of the production stage,
we receive revenue from the sales of molds and royalties from sales of lenses
made from our designs. Sometimes we produce and sell to customers semi-
finished lenses based on the design which we develop for them; we recognized
this as sales of lenses. 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 and finished
progressive lenses and other lenses. Semi-finished lenses are sold through our
distributors, Shamir Insight and Altra; finished lenses and other lenses are
sold mainly in Europe through our local subsidiaries. Revenues from lenses are
recognized when delivery has occurred. Currently, our revenue from Freeform
technology is not material.

Design Services

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

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

|                    |  |                         |        |      |   |        |  |   |         | 
|------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------- | 
|                    |  | Year Ended December 31, |       
|                    |  | 2005                    |        | 2006 |   | 2007   | 
|                    |  |                         |        |      |   |        | 
|                   
|Lenses              |  | $                       | 72,520 |      | $ | 90,387 |  | $ | 113,945 | 
|Design services     |  |                         | 7,844  |      |   | 6,893  |  |   | 6,474   | 
|                    |  |                         |        |      |   |        |  |   |         | 
|Total revenues, net |  | $                       | 80,364 |      | $ | 97,280 |  | $ | 120,419 | 
|                    |  |                         |        |      |   |        |  |   |         | 

The
increase in our revenues from the sale of lenses was primarily due to the
success of the increased marketing activities of Altra, which increased its
sales from $44.8 million in 2005 to $67.9 million in 2007. In addition, Shamir
Insight, increased its sales over the same period from $17.6 million to $24.3
million. We also sell our lenses through local distributors and to other
third party manufacturers in other countries, which sales increased from $10.0
million in 2005 to $21.7 million in 2007.

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

|                      |  |                         |        |      |   |        |  |   |         | 
|--------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------- | 
|                      |  | Year Ended December 31, |       
|                      |  | 2005                    |        | 2006 |   | 2007   | 
|                      |  |                         |        |      |   |        | 
|                     
|Europe                |  | $                       | 46,404 |      | $ | 50,747 |  | $ | 63,230  | 
|United States         |  |                         | 26,047 |      |   | 30,077 |  |   | 36,681  | 
|Asia                  |  |                         | 4,099  |      |   | 9,560  |  |   | 12,695  | 
|Israel                |  |                         | 787    |      |   | 853    |  |   | 1,892   | 
|Others                |  |                         | 3,027  |      |   | 6,043  |  |   | 5,921   | 
|                      |  |                         |        |      |   |        |  |   |         | 
|Total
  revenues, net |  | $                       | 80,364 |      | $ | 97,280 |  | $ | 120,419 | 
|                      |  |                         |        |      |   |        |  |   |         | 

Cost of Revenues

Our
cost of revenues consists primarily of manufacturing costs incurred in the
production of lenses and molds, and is comprised mainly of raw materials,
salaries and other personnel expenses for employees engaged in the manufacture
of our products. Other expenses  include
inter alia sub-contractor
services, depreciation on property and equipment, rent and utilities. Our cost
of revenues also includes the cost of lenses purchased from other manufactures.
Our cost of revenues is affected, directly or indirectly, by a number of
factors, as follows: mixture of products, currency fluctuations, the
establishment or purchase of new production facilities and increased focus on
production technologies that have a high added value.

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Gross Profit

Our
gross profit margin was approximately 55%, 55% and 54% for the years ended
December 31, 2005, 2006 and 2007, respectively. We have maintained our margins
throughout this period notwithstanding a significant increase in manufacturing
costs corresponding to the significant increase in lens revenues. Our
gross margin is affected, among other things, by the mixture of products sold,
by production efficiency, by our penetration efforts to new markets and by the
U.S. dollar versus the NIS and Euro exchange rates.

Research and Development

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

In
2007 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 and Turkey. The increase in our selling and
marketing expenses during 2007 was caused mainly as a result of the
increase in revenues. As a percentage of revenues, our selling and marketing
expenses decreased from 34% for the year ended December 31, 2006 to 30% for the
year ended December 31, 2007.

As
we expand our operations, we expect our selling and marketing expenses to
increase in absolute dollar terms and 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 expenses of requirements
imposed on us as a public company, and due to the increase in our management
personnel worldwide. We expect our general and administrative expenses to
increase in absolute dollar terms and to remain at approximately the same level
as a percentage of our revenues.

Financial Income (Expenses) and other, Net

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

Stock-Based Compensation

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

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

31

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

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, 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 Shamir Israel (until August 15, 2007, the
date on which we purchased the remaining 50% interest in Shamir Israel) SOT,
Shalens and CIO as of December 31, 2007, and equity in losses of affiliates is
shown in our consolidated financial statements primarily to reflect our
holdings in Shamir Israel, Shalens and CIO as of December 31, 2006. In 2005 we
had no equity in gains (losses) of affiliates.

Minority Interests in Losses of Subsidiaries

Minority
interests are reflected in our consolidated financial statements in order to
reflect our non-wholly owned subsidiaries. We have a 49% minority holding in
Altra. Our minority interest in Shamir Insight decreased from 43.3% to 10%
during 2005, and was fully purchased in July 2007. Since our acquisition of 51%
in January 2006 of Spherical Optics (Pty) Ltd., we have a 49% minority holding
in such subsidiary.

Operating Results

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

|                                              |  |                         |       |      |  |       |   |  |       |  
|--------------------------------------------- |  | ----------------------- | ----- | ---- |  | ----- | - |  | ----- | -
|                                              |  | Year Ended December 31, |      
|                                              |  | 2005                    |       | 2006 |  | 2007  |  
|                                              |  |                         |       |      |  |       |  
|                                             
|Revenues, net                                 |  |                         | 100.0 |      |  | 100.0 |   |  | 100.0 |  
|Cost of revenues                              |  |                         | 44.8  |      |  | 45.3  |   |  | 46.4  |  
|                                              |  |                         |       |      |  |       |   |  |       |  
|Gross profit                                  |  |                         | 55.2  |      |  | 54.7  |   |  | 53.6  |  
|Operating expenses:                           |  |                         |       |      |  |       |   |  |       |  
|Research and development                      |  |                         | 2.1   |      |  | 2.4   |   |  | 2.1   |  
|Selling and marketing                         |  |                         | 29.4  |      |  | 33.7  |   |  | 30.3  |  
|General and administrative                    |  |                         | 8.6   |      |  | 11.3  |   |  | 11.3  |  
|                                              |  |                         |       |      |  |       |   |  |       |  
|Total operating expenses                      |  |                         | 40.1  |      |  | 47.4  |   |  | 43.7  |  
|                                              |  |                         |       |      |  |       |   |  |       |  
|Operating income                              |  |                         | 15.1  |      |  | 7.3   |   |  | 9.9   |  
|Financial income (expenses) and
  other, net  |  |                         | 0.5   |      |  | (0.2  | ) |  | (0.2  | )
|                                              |  |                         |       |      |  |       |   |  |       |  
|Income before taxes on income                 |  |                         | 15.6  |      |  | 7.1   |   |  | 9.7   |  
|Taxes on income                               |  |                         | 5.6   |      |  | 2.2   |   |  | 4.2   |  
|                                              |  |                         |       |      |  |       |   |  |       |  
|Income after taxes on income                  |  |                         | 10.0  |      |  | 4.9   |   |  | 5.5   |  
|Equity in gains (losses) of
  affiliates, net |  |                         | 0     |      |  | (0.3  | ) |  | 0     |  
|Minority interest in losses of
  subsidiaries |  |                         | 0.1   |      |  | 2.0   |   |  | 1.3   |  
|                                              |  |                         |       |      |  |       |   |  |       |  
|Net income                                    |  |                         | 10.1  |      |  | 6.6   |   |  | 6.8   |  
|                                              |  |                         |       |      |  |       |   |  |       |  

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 subsidiary Altra 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 Altra 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.

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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.

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
Income (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, a 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 the
subsidiaries of Altra.

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

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

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

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

33

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

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

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

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

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

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

Critical Accounting Policies

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

Revenue Recognition

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

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

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

34

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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 2005, 2006
and 2007, 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.

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

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.

As
a result of the implementation of FIN No. 48, we recognized a $481,000 increase
in liability for unrecognized tax benefits, which was accounted for as a
decrease to the January 1, 2007 balance of retained earnings.

35

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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. Goodwill
is tested for impairment by comparing the fair value of the reporting unit with
its carrying value. Fair value is determined using our market capitalization.
We have performed impairment tests during the fourth fiscal quarter of 2007.
Following the tests, we determined that our goodwill of $7.5 million was not
subject to impairment during fiscal year 2007.

Valuation of investment in marketable
securities

Fair
values of marketable securities are estimated using quoted market prices. As of
December 31, 2007 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.

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
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 157, Fair Value Measurements (SFAS No. 157). This Standard defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value
measurements. The provisions of SFAS No. 157 are effective for the
Company beginning January 1, 2008. The FASB issued a FASB Staff Position
(FSP) to defer the effective date of SFAS No. 157 for one year for all
non-financial assets and non-financial liabilities, except for those items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis. We do not expect the adoption will have material impact on our
consolidated financial statements.

In
December 2007, the U.S. Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 110 (SAB 110) to amend the SECs views
discussed in Staff Accounting Bulletin 107 (SAB 107) regarding
the use of the simplified method in developing an estimate of expected life of
share options in accordance with SFAS No. 123(R). SAB 110 is
effective for the Company beginning in the first quarter of fiscal year 2008.
The adoption of SAB 110 did not have a material impact on our consolidated
financial statements.

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In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS
No. 141(R)). This Statement replaces SFAS No. 141, Business Combinations
(SFAS No. 141), and requires an acquirer to recognize the assets acquired,
the liabilities assumed, including those arising from contractual
contingencies, any contingent consideration, and any non-controlling interest
in the acquiree at the acquisition date, measured at their fair values as of
that date, with limited exceptions specified in the statement. SFAS No. 141(R)
also requires the acquirer in a business combination achieved in stages
(sometimes referred to as a step acquisition) to recognize the identifiable assets
and liabilities, as well as the non-controlling interest in the acquiree, at
the full amounts of their fair values (or other amounts determined in
accordance with SFAS No. 141(R)). In addition, SFAS No. 141(R)s requirement to
measure the non-controlling interest in the acquiree at fair value will result
in recognizing the goodwill attributable to the non-controlling interest in
addition to that attributable to the acquirer. SFAS No. 141(R) amends SFAS No.
109, Accounting for Income Taxes (SFAS No. 109),to require the acquirer to
recognize changes in the amount of its deferred tax benefits that are
recognizable because of a business combination either in income from continuing
operations in the period of the combination or directly in contributed capital,
depending on the circumstances. It also amends SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142), to, among other things, provide guidance on
the impairment testing of acquired research and development intangible assets
and assets that the acquirer intends not to use. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. We are currently assessing the potential impact that the
adoption of SFAS No. 141(R) could have on our consolidated financial
statements.

In
December 2007, the FASB issued SFAS No.160 (SFAS No. 160), Non-controlling
Interests in Consolidated Financial Statements. SFAS No. 160 amends Accounting
Research Bulletin 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. It also clarifies that
a non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 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
non-controlling 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 non-controlling interest. SFAS No. 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 non-controlling owners
of a subsidiary. SFAS No. 160 is effective for fiscal periods, and interim
periods within those fiscal years, beginning on or after December 15, 2008. We
are currently assessing the potential impact that the adoption of SFAS No.
160(R) could have on our consolidated financial statements.

5.BLIQUIDITY AND
CAPITAL RESOURCES

From
the commencement of our business through December 31, 2007, 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, 2007, we had working capital of $52.3 million, cash and cash
equivalents and short term investments of $33.3 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, |  
|                                                      |  | 2005                    |   | 2006 |         | 2007 | 
|                                                      |  |                         |   |      |         |      | 
|                                                      |  |                         |   |      |         |      |  |         |   | 
|Net cash (used in) provided by
  operating activities |  | 10,002                  |   |      | (1,015  | )    |  | 11,745  |   | 
|Net cash used in investing
  activities               |  | (24,788                 | ) |      | (14,550 | )    |  | (11,006 | ) | 
|Net cash provided by (used in)
  financing activities |  | 36,530                  |   |      | 10,936  |      |  | (5,399  | ) | 

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

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

We
anticipate that we will be able to meet our short-term liquidity needs through
our working capital and that we will be able to meet our long-term liquidity
needs, which may include investments in facilities, acquisitions and fixed
assets, through long-term loans, the proceeds from our March 2005 offering of
our ordinary shares 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).

37

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Our
operating activities provided cash of $10.0 million and $11.7 million for the
years ended December 31, 2005, and 2007, 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 $24.8 million, $14.6 million and $11.0
million for the years ended December 31, 2005, 2006 and 2007, respectively. The
2007 figures include $2.5 million of proceeds from the sale of short term investments, net. The 2006 figures
include $2.2 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 additional loans to CIO,
the acquisition of our holdings in SOT and the shareholder loans we have
granted it, the acquisition of our subsidiary in Turkey, the purchase of fixed
assets for the new polycarbonate factory and laboratory of SSOP, and the
expansion of our production facility in Portugal.

Our
financing activities provided cash of $36.5 million and $10.9 million for the
years ended December 31, 2005 and 2006, respectively. For the year ended
December 31, 2007, our financing activities used cash of $ 5.4 million. In
2007, we used the cash primarily for a dividend in the amount of $4.0 million.

In
March 2005 we received $42.2 million in net proceeds from our initial public
offering. In 2006 we received long-term loans and short-term bank credit
totaling $12.3 million and $4.0 million, respectively. The receipt of long-term
loans was due to our financing of our operations through Altra in Turkey,
France and the United Kingdom, and for the expansion of the laboratory in
Portugal due to the increase of our European activities.

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

Borrowings

|                                         |  |                                |     |                                             |   |        | 
|---------------------------------------- |  | ------------------------------ | --- | ------------------------------------------- | - | ------ | 
|                                         |  | Weighted Average Interest Rate |     | December 31, 2007(U.S. dollarin  thousands) |  
|                                         |  |                                |     |                                             |  
|                                         |  |                                |     |                                             |   |        | 
|Short-term bank credit and
  loans       |  |                                |     |                                             |   |        | 
|Mainly denominated in Euro               |  |                                | 6.4 |                                             | $ | 15,950 | 
|                                         |  |                                |     |                                             |   |        | 
|                                         |  |                                |     |                                             |   |        | 
|Minority shareholders in
  subsidiaries: |  |                                |     |                                             |   |        | 
|Mainly denominated in Euro               |  |                                | 4.9 |                                             |   | 5,959  | 
|                                         |  |                                |     |                                             |   |        | 
|                                         |  |                                |     |                                             |   |        | 
|Long-term loans:                         |  |                                |     |                                             |   |        | 
|Dollars                                  |  |                                | 2.7 |                                             |   | 263    | 
|Euro                                     |  |                                | 4.9 |                                             |   | 15,802 | 
|NIS                                      |  |                                | 4.4 |                                             |   | 734    | 
|                                         |  |                                |     |                                             |   |        | 
|                                         |  |                                |     |                                             |   |        | 
|                                         |  |                                |     |                                             |   | 16,799 | 
|                                         |  |                                |     |                                             |   |        | 
|                                         |  |                                |     |                                             |   |        | 
|Total bank credit and loans              |  |                                |     |                                             | $ | 38,708 | 
|                                         |  |                                |     |                                             |   |        | 

As
of December 31, 2007, we had aggregate short-term bank credit, short-term loans
and long-term loans of $1.6 million, $14.3 million and $22.8 million,
respectively ($1.4, $12.3 and $20.7, respectively, in 2006). As of December 31,
2007 and 2006, we had aggregate capital leases of $6.7 million and $6.0
million, respectively. These borrowings are divided between our subsidiaries
and us as follows: $31.7 million are held by Altra, $0.5 million are held by
Shamir Optical, and $0.5 million from other subsidiaries. In addition, there
are $6.0 million in loans from minority shareholders. The increase in
borrowings is attributed to the loans for the new facility in Portugal. The
change in the exchange rate of the Euro versus the U.S. dollar was reflected in an increase of
our outstanding bank credit and loans as of December 31, 2007, compared to
December 31, 2006.

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.

38

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---

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

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

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

Research
and development spending for fiscal years ended December 31, 2007, 2006, and
2005 was $2.6 million, $2.4 million and $1.7 million, respectively.

5.DTREND 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, 2007, in thousands of U.S. dollars:

|                                                                                |  |                 |        |      |   |       |  |      |       |      |   |                       |  |   |       |  |   |        | 
|------------------------------------------------------------------------------- |  | --------------- | ------ | ---- | - | ----- |  | ---- | ----- | ---- | - | --------------------- |  | - | ----- |  | - | ------ | 
|                                                                                |  | Payments Due In |       
|                                                                                |  |                 |       
|                                                                                |  | Total           |        | 2008 |   | 2009  |  | 2010 |       | 2011 |   | 2012 and
  Thereafter | 
|                                                                                |  |                 |        |      |   |       |  |      |       |      |   |                       | 
|                                                                                |  |                 |        |      |   |       |  |      |       |      |   |                       |  |   |       |  |   |        | 
|Contractual obligations:                                                        |  |                 |        |      |   |       |  |      |       |      |   |                       |  |   |       |  |   |        | 
|                                                                                |  |                 |        |      |   |       |  |      |       |      |   |                       |  |   |       |  |   |        | 
|Long-term debt (without loans from minority shareholders in
subsidiaries)
  (1) |  | $               | 16,799 |      | $ | 5,267 |  | $    | 5,528 |      | $ | 2,002                 |  | $ | 1,163 |  | $ | 2,839  | 
|Capital lease                                                                   |  |                 | 6,725  |      |   | 2,422 |  |      | 1,937 |      |   | 956                   |  |   | 438   |  |   | 972    | 
|Operating lease obligations                                                     |  |                 | 18,933 |      |   | 1,811 |  |      | 1,714 |      |   | 1,693                 |  |   | 1,673 |  |   | 12,042 | 
|Loans from minority shareholders in subsidiaries
(2)                            |  |                 | 5,959  |      |   | -     |  |      | -     |      |   | -                     |  |   | -     |  |   | -      | 
|Tax reserve related to FIN 48 (3)                                               |  |                 | 845    |      |   | -     |  |      | -     |      |   | -                     |  |   | -     |  |   | -      | 
|Other long-term liabilities (4)                                                 |  |                 | 1,064  |      |   | 311   |  |      | 148   |      |   | 140                   |  |   | 183   |  |   | 282    | 
|                                                                                |  |                 |        |      |   |       |  |      |       |      |   |                       |  |   |       |  |   |        | 
|Total contractual obligations                                                   |  | $               | 50,325 |      | $ | 9,811 |  | $    | 9,327 |      | $ | 4,791                 |  | $ | 3,457 |  |   | 16,135 | 
|                                                                                |  |                 |        |      |   |       |  |      |       |      |   |                       |  |   |       |  |   |        | 

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

39

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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(1)          |  | 38  |  | President and Chief Executive
  Officer                                                                                   
|Dan Katzman                |  | 53  |  | Chief Technology Officer and
  Vice President of R&D                                                                      
|Dagan Avishai(2)(3)        |  | 48  |  | Vice President of Marketing                                                                                               
|Yagen Moshe                |  | 38  |  | Chief Financial Officer                                                                                                   
|Rami
  Ben-Zeev(2)(3)     |  | 58  |  | Vice President Business
  Management                                                                                      
|Giora Salz                 |  | 50  |  | President and Chief Executive
  Officer of Eyal Optical Industries (95) Ltd. and of Shamir Special Optical
  Products Ltd.
|Raanan Naftalovich        |  | 43  |  | Chief Executive Officer of
  Shamir Insight, Inc.                                                                         
|Ron Sonnenschein           |  | 58  |  | Chief Executive Officer of
  Altra Trading GmbH                                                                           
|Uzi Tzur(2)(5)             |  | 68  |  | Director and Chairman of the
  Board                                                                                      
|Giora
  Ben-Zeev(2)(3)(7) |  | 65  |  | Director and Vice Chairman of
  the Board                                                                                 
|Efrat Cohen(3)             |  | 40  |  | Director                                                                                                                  
|Guy Vaadia(4)              |  | 44  |  | Director                                                                                                                  
|Ami Samuels(6)             |  | 49  |  | Director                                                                                                                  
|Joseph Tzur(6)             |  | 55  |  | Director                                                                                                                  
|Zeev Feldman(4)           |  | 56  |  | Director                                                                                                                  

---

|    |                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Hayardeny was appointed as
  our President and Chief Executive Officer effective as of April 2, 2008.                                                                      
|(2) | Member of Kibbutz Shamir.                                                                                                                                                      
|(3) | Member of the management board
  of Kibbutz Shamir.                                                                                                                            
|(4) | Independent board member.                                                                                                                                                      
|(5) | Chairman of the management
  board of Kibbutz Shamir.                                                                                                                          
|(6) | External and independent board
  member.                                                                                                                                       
|(7) | Mr. Ben-Zeev, our former CEO,
  has been appointed as vice chairman of the board of directors and as director
  of strategic projects of Shamir effective as of April 2, 2008.

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.

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 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.

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Giora Salz.Mr. Salz joined our company as
President and Chief Executive Officer of Eyal Optical Industries (95) Ltd. in 2004.
In addition, since October 2007 he has been serving as a director and as
President and Chief Executive Officer of Shamir Special Optical Products Ltd.,
and since October 2006 as a member of the board of directors of Shamir Israel
Optical Marketing Ltd. Previously, he served as Chief Executive Officer of
Lehavot Manufacturing and Protection (95) Ltd., a fire defense equipment
company, from 1989 to 1999, and as the agriculture manager of Kibbutz Lehavot
from 1983 to 1985. Mr. Salz holds a BA degree in economics and business
management from Tel Aviv University and served as a Lieutenant Colonel in the
Israeli armed forces.

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

Ron Sonnenschein.Mr. Sonnenschein has been
the Chief Executive Officer of Altra Trading GmbH since 2002. Prior to this
position he served as the Executive Vice President of Altra. Prior to its
acquisition by us Mr. Sonnenschein served as the President and Chief Executive
Officer of Eyal Optical Industries (95) Ltd. from 1982 to 1989. Previously, he
served as the treasurer of Kibbutz Eyal between the years 1975 and 1979. Mr.
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. He was
appointed as vice chairman of the board of directors and as director of
strategic projects of Shamir effective as of 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.

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

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

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

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

41

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Zeev Feldman.Mr. Feldman has been a
member of our board of directors since March 2005. He is currently the Chief
Executive Officer of Feldaz Investments Ltd. and Feldaz 2005 Ltd., and a member
of the board of directors of Azimuth Ltd. From 1998 to 2003 he was the Chief
Executive Officer of FIBI Investment House Ltd. and FIBI Holdings Ltd. He has
served as a director on the boards of Cellcom Israel Ltd., Union Banks Mutual
Funds Ltd., FIBI Investment House Ltd., Intergama Ltd. (Chairman), RPK
Electronics Ltd., Medison Tech Ltd., Jordan Gate Projects Ltd. and Elleran
Investments Ltd. He holds a BA degree in economics and accounting from Tel Aviv
University and is a certified public accountant.

Board of Directors

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

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

Under
our Articles of Association, our board of directors must have at least two
members and no more than eleven. The members of our board of directors, other
than the External Directors, for whom special election requirements apply (see
External Directors), are elected and may in certain circumstances be removed
by the majority of our shareholders. Our Articles of Association provide that
our board of directors, other than the External Directors, will be divided into
three classes. Each class of directors will serve for a term of three years.
The term of office of the directors assigned to class B will expire at the next
annual meeting of shareholders, which will take place on July 31, 2008, and at
each third succeeding annual meeting thereafter. The term of office of the
directors assigned to class C will expire at the annual meeting of
shareholders, which will take place during the year of 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. Giora Ben-Zeev and Zeev Feldman serve as class A
directors, Efrat Cohen and Guy Vaadia serve as class B directors and Uzi Tzur
serves as the class C director. This classification of the board of directors
may delay or prevent a change of control of our company or in our management.

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

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

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

The
Israeli Companies Law provides that an Israeli company 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.

42

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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. The External Directors must be appointed by a special meeting of
our shareholders held within three months of the date we first offered our
shares to the public. In addition, each committee of the board of directors
entitled to exercise any powers of the board is required to include at least
one External Director. The audit committee must include all of the External
Directors. See Board Practices below.

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

A
person may not serve as an External Director if that persons position or other
activities create, or may create, a conflict of interest with the persons
service as a director or may otherwise interfere with the persons ability to
serve as a director. If at the time any External Director is appointed, all
members of the board are of the same gender, then the External Director to be
appointed must be of the other gender.

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

|  |                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | the majority of shares voted
  for the election includes at least one-third of the shares of non-controlling
  shareholders voted at the meeting; or                                         
|  |                                                                                                                                                                                              
|· | the total number of shares of
  non-controlling shareholders voted against the election of the External Director
  does not exceed one percent of the aggregate voting rights of the company.

The
Israeli Companies Law provides for an initial three-year term for an External
Director, which may be extended for one additional three-year term and thereafter
for additional three-year terms, if both the audit committee and the board of
directors confirm that in light of the expertise and contribution of the
External Director, the extension of such External Directors term would be in
the interest of our company. External
Directors may be removed only by the same special majority required for their
election or by a court, and then only if the External Directors cease to meet
the statutory qualifications for their appointment or if they violate their
duty of loyalty to the company. In the event of a vacancy created by an
External Director, our board of directors is required under the Israeli
Companies Law to call a shareholders meeting to appoint a new External
Director.

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

43

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6.BCOMPENSATION 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 (nine persons through
April 26, 2007, and seven as of April 26, 2007), excluding stock-based
compensation, for the year ended December 31, 2007 was $0.15 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 (nine persons),
excluding stock-based compensation, for the year ended December 31, 2007,
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 $2.2million,
including amounts set aside or accrued to provide for pension, retirement or
similar benefits. This amount does not include expenses we incurred for other
payments, including dues for professional and business associations, business
travel and other expenses, or other benefits commonly reimbursed or paid by
companies in Israel. We have also granted options to purchase our ordinary shares
to our officers as part of their overall compensation. See Share Ownership.

As
of June 15, 2008, options granted to our current and former directors and
officers to purchase a total of 1,612,652 of our ordinary shares were
outstanding, at exercise prices ranging from $2.46 to $14.00 with a weighted
average exercise price of $9.33 per share.
See  Share Ownership for a description of the options granted to our
officers.

6.CBOARD PRACTICES

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

Audit Committee

Under
the Israeli Companies Law, the audit committee must consist of at least three
directors and must include both of the External Directors. In addition, the
rules of the NASDAQ Global Market require that at least one member of our audit
committee have experience or background that results in such members
financial sophistication. Our audit
committee is comprised of Ami Samuels as chairman, Joseph Tzur and Zeev
Feldman. Our board of directors has determined that Zeev Feldman is
financially sophisticated for purposes of the NASDAQ rules. The composition and function of the audit
committee meet the requirements of the Sarbanes-Oxley Act of 2002 and the rules
and regulations thereunder, as well as the NASDAQ Global Market rules.

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

44

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Compensation Committee

The
compensation committee recommends to the board of directors in accordance to
issuance of employee share options under our share option plan, determines
salaries and bonuses for our executive officers and incentive compensation for
our other employees. The members of our compensation committee are Zeev
Feldman as chairman, Joseph Tzur and Ami Samuels. The composition and functions
of the compensation committee meet the requirements of the NASDAQ Global Market
rules.

Nominating and Governance Committee

The
nominating and governance committee makes recommendations to the board of
directors regarding candidates for directorships and the size and composition
of the board. In addition, the committee is responsible for overseeing our
corporate governance guidelines and reporting and making recommendations to the
board regarding corporate governance matters. The members of the nominating and
governance committee are Zeev Feldman as chairman, Joseph Tzur and Guy Vaadia.
The composition and functions of the nominating and governance committee meet
the requirements of the NASDAQ 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.

6.DEMPLOYEES

As
of June 15, 2008, our worldwide workforce consists of 1,345  people, which includes approximately 52
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 |  | 2006 |     | 2007 |  | 2008 | 
|                                     |  |      |     |      |  |      | 
|                                     |  |      |     |      |  |      |  |  |       | 
|Research and development             |  |      | 42  |      |  | 41   |  |  | 45    | 
|Marketing and sales                  |  |      | 168 |      |  | 199  |  |  | 275   | 
|Management and administration        |  |      | 137 |      |  | 159  |  |  | 233   | 
|Manufacturing and warehouse          |  |      | 498 |      |  | 536  |  |  | 792   | 
|                                     |  |      |     |      |  |      |  |  |       | 
|Total                                |  |      | 845 |      |  | 935  |  |  | 1,345 | 
|                                     |  |      |     |      |  |      |  |  |       | 
|                                     |  |      |     |      |  |      |  |  |       | 
|Israel                               |  |      | 359 |      |  | 385  |  |  | 423   | 
|United States                        |  |      | 72  |      |  | 75   |  |  | 77    | 
|Europe                               |  |      | 401 |      |  | 466  |  |  | 485   | 
|Mexico                               |  |      | 0   |      |  | 0    |  |  | 350   | 
|South Africa                         |  |      | 13  |      |  | 9    |  |  | 10    | 
|                                     |  |      |     |      |  |      |  |  |       | 
|Total                                |  |      | 845 |      |  | 935  |  |  | 1,345 | 
|                                     |  |      |     |      |  |      |  |  |       | 

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

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

45

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6.ESHARE OWNERSHIP

Our
executive officers and other certain employees, other than directors, hold
options to purchase 1,439,096 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.

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.

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

On
June 30, 2006, we granted Yagen Moshe, our chief financial officer, 50,000
options at an exercise price of $9.00 per share. In addition, on August 21,
2007 we granted Yagen 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, a vice president at Altra, 23,540 and 50,000
options each, respectively, with an exercise price of $9.99 per share.

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.

All
of the options described above are granted pursuant to our 2005 General Share
and Incentive Plan that was approved and adopted by our board on February1,
2006. The Plan provides that 25% of the shares shall vest one year after the
date of grant, and the remaining 75% shall vest on a monthly basis, with 1/36
of the remaining shares vesting on each month commencing at the end of the
first anniversary of the date of grant. According to the Plan during the year
2006 we could grant 350,000 options to purchase our shares and in each
following year the option pool shall increase by an additional 280,000 options.
On May 27, 2008, our audit committee and board of directors resolved, subject
to the approval of our shareholders, to amend 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, on May 27, 2008, our audit committee and board of directors resolved,
subject to the approval of our shareholders, 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. The adjustment to the exercise
price of outstanding options is contingent on shareholder approval of the
abovementioned amendment to the 2005 General Share and Incentive Plan.

46

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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. The options may be exercised no later than December 31, 2008.

47

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7.AMAJOR
SHAREHOLDERS

The
following table and footnotes set forth information, as of June 15, 2008,
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, 2008.

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 16,423,470 ordinary shares outstanding as of June 15, 2008, 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)             |  | 59.04             | % |                  | 9,695,809 | 
|FIBI Investment House Ltd.(2) |  | 8.28              | % |                  | 1,360,226 | 
|Dan
  Katzman(3)              |  | 1.77              | % |                  | 307,817   | 
|Royce
  & Associates, LLC(4)  |  | 9.98              | % |                  | 1,639,100 | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on a 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, Avraham Hadar, Zeev Markman, Ilan Pickman,
  Pinchas Carmi, Yossi Michaeli, Yaakov Gotlib, 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 executive officer and 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 Guy
  Vaadia. The members of the board of directors of FIBI are Zadik Bino, Gil
  Bino Garry Stock and Guy Vaadia. The members of the board of directors of
  FIBI Holdings Ltd. are Zadik Bino, Gil Bino, Garry Stock, Harry (Hersh)
  Cooper, Yossef Alchech, Gabriel Roter and Nilli Even-Chen.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | FIBI is an affiliate of a
  broker-dealer. FIBI has represented to us that it purchased the shares being
  registered for resale in the ordinary course of business and that, at the
  time of the purchase, it had no agreements or understandings, directly or
  indirectly, with any person to distribute the securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Based on 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

48

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|    |                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 Schedule 13G filed with the SEC by Royce & Associates, LLC
  on February 6, 2008.                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                            
|    | There
  are no holders of record of our ordinary shares who are, to our knowledge,
  U.S. persons.                                                                                                                                                                                                                                         

7.BRELATED 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.

The
economic activities and strategy of Kibbutz Shamir are managed by an elected
management board. This board is the key economic decision-making body of
Kibbutz Shamir. Its members are elected by the members of the council of
Kibbutz Shamir for terms of three years. The chairman of the management board
is elected for a term of four years directly by the members of Kibbutz Shamir.
Kibbutz Shamirs council is elected annually by the Kibbutz Shamir members. The
council may remove a member of the management board by a simple majority vote.
The boards of directors of Kibbutz Shamirs companies operate independently
from the management board of Kibbutz Shamir itself. The chairman of our  board of directors, Uzi Tzur, is also the
chairman of the management board of Kibbutz Shamir and a member of Kibbutz
Shamir. Our board members and two of our companys executive officers, Dagan
Avishai and Rami Ben-Zeev, are also members Kibbutz Shamir and of the
management board of Kibbutz Shamir. Another one of our directors, Efrat Cohen,
is a member of the management board of Kibbutz Shamir but not a member of
Kibbutz Shamir itself. As of June 15, 2008, approximately 52 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.

49

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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
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
2007 we paid a total of approximately $1.2 million to Kibbutz Shamir under the
working service agreement.

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

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

Service Agreement with Kibbutz Shamir

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

The
fee for all of these services except water usage was initially fixed at NIS
92,000 per month. The fee is linked to the consumer price index and reviewed
every five years. In the event that the cost to Kibbutz Shamir of providing
these services increases or decreases during the final year of the agreements
five-year cycle as compared to the effective date of the agreement, the service
fee shall be adjusted accordingly. If the costs increase or decrease by 30% or
more in any particular year during the term of the agreement, the service fee
will be adjusted for the following year. If Kibbutz Shamir provides additional
services to us, the fee shall be adjusted accordingly. The fee for catering
services is adjusted continuously based on the actual number of employees using
these services.

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

The
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
2007 we paid a total of approximately $0.4 million to Kibbutz Shamir under the
service agreement.

50

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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.

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.

51

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

Except
for these changes, we believe that the payments to be made under the amended
agreement will for the foreseeable future be substantially similar to the
amounts we have paid under the prior agreement. In 2007 we paid a total of
approximately $0.3 million to Kibbutz Shamir under the sublease agreement.

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

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

At
our 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 is to
be repaid in equal quarterly installments over a period of four years
commencing March 31, 2005, through deductions of the rental fees we pay to
Kibbutz Shamir. The loan bears interest at 1.5% per year.

At our 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. As of
the date of this annual report, the loan was fully repaid.

Shareholders Agreement

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

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

52

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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 10.5% of our outstanding shares.

Registration
Rights Agreement

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

Relationship with
Kibbutz Eyal

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

In December
2003, we granted Kibbutz Eyal a call option exercisable until January 10, 2004,
to purchase 4,170 of our shares in consideration for an exercise price of $2.0
million. Kibbutz Eyal exercised the call option on January 4, 2004. We also
granted Kibbutz Eyal a put option to sell the shares subject to the call option
to us in consideration for $3.0 million. The put option was exercisable between
January 1, 2006 and January 10, 2010. It expired upon the reorganization of our
company from an A.C.S. into an Israeli corporation.

Kibbutz Eyal
holds a tag-along right to join a sale of our shares by Kibbutz Shamir in
certain circumstances. Kibbutz Eyal waived its right to appoint a member of our
board of directors on November 27, 2004, effective as of the closing of the
March 2005 offering. Kibbutz Eyal currently holds approximately 1.69% 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.

Relationship with Altras
Former Chief Executive Officer

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

7.C INTERESTS OF EXPERTS AND COUNSEL

Not applicable.

53

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ITEM 8. FINANCIAL
INFORMATION

8.ACONSOLIDATED STATEMENTS AND OTHER
FINANCIAL INFORMATION

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

Export Sales

In 2007,
substantially, all of our mold and semi-finished lenses were produced in
Israel. Production of finished lenses took place outside of Israel. Most of our
export sales from Israel abroad are to our subsidiaries. Our export sales from
Israel abroad to external customers totaled approximately $8.8 million, which
is 7.3% 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 patents, as described below.

In November
2003, one of Shamirs laboratory customers in the United States was notified by
a large lens manufacturer that the manufacturer believes that the sales of a
certain lens constitutes an infringement of a certain patent belonging to it.
Shamir has denied any such infringement allegations and has entered into
negotiations with the manufacturer with regard to this patent in order to reach
a resolution. In August 2007 a licensing agreement regarding the use of such
patent in the U.S. was executed between the parties and all allegations were
fully settled.

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

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.BSIGNIFICANT CHANGES

See Note 20 to
our consolidated financial statements included elsewhere in this annual report.

54

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ITEM 9. THE LISTING

9.ALISTING 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 10, 2005 through
  December 31, 2005) |  | $    | 16.74 |     | $ | 8.45 | 
|2006                                                                  |  | $    | 11.75 |     | $ | 8.08 | 
|2007                                                                  |  | $    | 12.75 |     | $ | 7.60 | 

|               |  |      |       |     |   |      | 
|-------------- |  | ---- | ----- | --- | - | ---- | 
|2006           |  | High |       | Low |  
|               |  |      |       |     |  
|              
|First Quarter  |  | $    | 11.75 |     | $ | 9.26 | 
|Second Quarter |  | $    | 10.75 |     | $ | 8.70 | 
|Third Quarter  |  | $    | 9.80  |     | $ | 8.08 | 
|Fourth Quarter |  | $    | 9.75  |     | $ | 8.51 | 

|               |  |   |       |  |   |      | 
|-------------- |  | - | ----- |  | - | ---- | 
|2007           |  |   |       |  |   |      | 
|               |  |   |       |  |   |      | 
|              
|First Quarter  |  | $ | 9.06  |  | $ | 7.60 | 
|Second Quarter |  | $ | 10.64 |  | $ | 8.83 | 
|Third Quarter  |  | $ | 12.75 |  | $ | 9.84 | 
|Fourth Quarter |  | $ | 12.12 |  | $ | 7.94 | 

|                                       |  |   |      |  |   |      | 
|-------------------------------------- |  | - | ---- |  | - | ---- | 
|2008                                   |  |   |      |  |   |      | 
|                                       |  |   |      |  |   |      | 
|                                      
|First
  Quarter                        |  | $ | 9.56 |  | $ | 6.61 | 
|Second Quarter (through June 15, 2008) |  | $ | 7.80 |  | $ | 6.70 | 

|                                  |  |      |       |     |   |      | 
|--------------------------------- |  | ---- | ----- | --- | - | ---- | 
|Month                             |  | High |       | Low |  
|                                  |  |      |       |     |  
|                                 
|December 2007                     |  | $    | 10.00 |     | $ | 7.94 | 
|January 2008                      |  | $    | 9.56  |     | $ | 8.01 | 
|February 2008                     |  | $    | 8.11  |     | $ | 7.10 | 
|March 2008                        |  | $    | 8.01  |     | $ | 6.61 | 
|April 2008                        |  | $    | 7.29  |     | $ | 6.71 | 
|May 2008                          |  | $    | 7.80  |     | $ | 6.74 | 
|June 2008 (through June 15, 2008) |  | $    | 7.20  |     | $ | 6.70 | 

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 March 10, 2005 through
  December 31, 2005) |  |      | NIS 76.42 |     |  | NIS 41.40 | 
|2006                                                                  |  |      | NIS 54.00 |     |  | NIS 35.92 | 
|2007                                                                  |  |      | NIS 52.77 |     |  | NIS 31.78 | 

|               |  |      |           |     |  |           | 
|-------------- |  | ---- | --------- | --- |  | --------- | 
|2006           |  | High |           | Low | 
|               |  |      |           |     | 
|              
|First Quarter  |  |      | NIS 54.00 |     |  | NIS 44.35 | 
|Second Quarter |  |      | NIS 49.11 |     |  | NIS 40.00 | 
|Third Quarter  |  |      | NIS 41.87 |     |  | NIS 35.92 | 
|Fourth Quarter |  |      | NIS 41.85 |     |  | NIS 33.09 | 

|               |  |  |           |  |  |           | 
|-------------- |  |  | --------- |  |  | --------- | 
|2007           |  |  |           |  |  |           | 
|               |  |  |           |  |  |           | 
|              
|First Quarter  |  |  | NIS 37.57 |  |  | NIS 32.30 | 
|Second Quarter |  |  | NIS 42.77 |  |  | NIS 35.17 | 
|Third Quarter  |  |  | NIS 52.77 |  |  | NIS 41.57 | 
|Fourth Quarter |  |  | NIS 48.42 |  |  | NIS 31.78 | 

|                                       |  |  |           |  |  |           | 
|-------------------------------------- |  |  | --------- |  |  | --------- | 
|2008                                   |  |  |           |  |  |           | 
|                                       |  |  |           |  |  |           | 
|                                      
|First Quarter                          |  |  | NIS 39.00 |  |  | NIS 22.31 | 
|Second Quarter (through June 15, 2008) |  |  | NIS 27.09 |  |  | NIS 22.41 | 

|                                  |  |      |           |     |  |           | 
|--------------------------------- |  | ---- | --------- | --- |  | --------- | 
|Month                             |  | High |           | Low | 
|                                  |  |      |           |     | 
|                                 
|December 2007                     |  |      | NIS 38.50 |     |  | NIS 31.78 | 
|January 2008                      |  |      | NIS 39.00 |     |  | NIS 28.00 | 
|February 2008                     |  |      | NIS 29.50 |     |  | NIS 25.94 | 
|March 2008                        |  |      | NIS 28.29 |     |  | NIS 22.31 | 
|April 2008                        |  |      | NIS 25.74 |     |  | NIS 23.75 | 
|May 2008                          |  |      | NIS 27.09 |     |  | NIS 22.41 | 
|June 2008 (through June 15, 2008) |  |      | NIS 25.12 |     |  | NIS 23.03 | 

55

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9.BPLAN OF DISTRIBUTION

Not applicable.

9.CMARKETS

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.

56

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ITEM 10. ADDITIONAL
INFORMATION

10.ASHARE CAPITAL

Not applicable

10.BARTICLES 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.

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.

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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 a foreign company, less favorably than U.S. tax law.
Israeli tax law may, for example, subject a shareholder who exchanges our
shares for shares in a foreign corporation to immediate Israeli taxation. See
 Israeli Taxation.

Modification of Class
Rights

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

Election of Directors

Our
ordinary shares do not have cumulative voting rights in the election of
directors. Therefore, the holders of ordinary shares representing more than 50%
of the voting power at the general meeting of the shareholders, in person or by
proxy, have the power to elect all of the directors whose positions are being
filled at that meeting, to the exclusion of the remaining shareholders.
External Directors are elected by a majority vote at a shareholders meeting,
provided that either: (i) the majority of shares voting for the election
includes at least one-third of the shares of non-controlling shareholders
participating in the vote (abstaining votes shall not be taken into account);
or (ii) the total number of shares of non-controlling shareholders voting
against the election of the External Director does not exceed one percent of
the aggregate voting rights in the company. Our Articles of Association contain
provisions providing for staggered terms for the members of our board of
directors.

Voting, Shareholders
Meetings and Resolutions

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

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

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

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

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

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

Transfer Agent and
Registrar

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

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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 11,650,079 shares, have the
right, subject to some limited conditions, to demand that we file a
registration statement on their behalf to register their shares under the U.S.
Securities Act of 1933. Each of the shareholders has the right to make two such
demands, with the exception of Vision Capital LLC, which has the right to make
one such demand. According to the agreement, we will bear the registration
fees, filing fees and certain other costs incurred in connection with the
registration resulting from the first of these demands by each shareholder,
while the shareholders will bear the costs resulting from a second such demand.
Under the agreement, the shareholders also have the right to demand that we
include their shares in a registration statement that we file on our behalf or
on behalf of other shareholders. These rights became effective in September
2005 and will terminate either in February 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.DEXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS

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

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

10.ETAXATION

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.

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

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

Dividends

If
we make any distributions of cash or other property to you, you generally will
be required to include in gross income as 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.

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.

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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.

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.

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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.

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 2006, 2008, 2012, respectively. The benefits
are contingent upon compliance with the terms of the approval and of the
Encouragement Law.

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

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

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.

63

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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 2007 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.

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 has elected to measure its results for tax purposes
on the basis of the changes in the exchange rate of NIS against the dollar. As
of the year 2007, Eyal and SSOP also elected to measure their results for tax
purposes on the basis of the changes in the exchange rate of NIS against the
U.S. dollar.

Tax Benefits for Research and
Development

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. We believe that we currently qualify as an
industrial company under this definition in Shamir, Eyal and SSOP.

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.                                                                                   

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.

64

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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).

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.

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.

65

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Taxation
of Non-Resident Shareholders

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

Foreign
Exchange Regulations

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

10.FDIVIDENDS AND PAYING AGENTS

Not applicable.

10.G STATEMENTS BY
EXPERTS

Not applicable.

10.HDOCUMENTS 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 atwww.sec.gov.

10.ISUBSIDIARY INFORMATION

Not applicable.

ITEM 11. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Foreign
Currency Risk

We conduct our
business primarily in 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.

66

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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 2007 we generated approximately
43% of our revenues in dollars and 46% in Euros, and we incurred approximately
16% of our operating expenses in NIS, 32% in dollars and 42% in Euros.

In Europe we
operate through our subsidiary Altra, which has most of its assets and
liabilities in Euros and credit facilities in Euros. In the United States we
operate through our subsidiaries Shamir Insight and Shamir USA, which have
assets and liabilities in U.S. dollars. Shamir and our Israeli subsidiaries
operate in Israel and have assets and liabilities mainly in dollars, as well as
some assets in Euros and some liabilities in Euros and NIS (for employee
compensation). We attempt to match our assets and liabilities in the same
currency in order to counteract fluctuations in currency exchange rates.
Commencing in 2008 we have assets and liabilities in Mexican Pesos as well.

As of December
31, 2007, we had $23.3 million in monetary current assets and $33.7 million in
monetary current liabilities that are denominated in Euros. Additionally, we
had $3.1 million in monetary current assets and $5.2 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. While we may in a small number of instances be exposed
to credit risk with respect to our customers and our suppliers, we believe that
this risk is not material.

ITEM 12. DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable

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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                 |  | 3,400,000                    |  | 42,275,000                                                          | 
|Selling
  Shareholders |  | 1,200,000                    |  | 15,624,000                                                          | 
|                       |  |                              |  |                                                                     |  |  | 
|                       |  |                              |  |                                                                     |  |  | 
|Total                  |  | 4,600,000                    |  | 57,899,000                                                          | 

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, 2008, 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 $11.6
  million to establish the new SSOP production facilities;                                                             
| |   |                                                                                                                                                   
| | · | to pay approximately $1.0
  million in order to establish and expand Shamir Israels operation;                                                   
| |   |                                                                                                                                                   
| | · | 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; and
| |   |                                                                                                                                                   
| | · | to pay approximately $0.8
  million to acquire a 25.8% stake in our Thai manufacture and distributor.                                             

68

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We
expect to use the remaining net proceeds from the offering as follows to fund
working capital requirements and other general corporate purposes. Until we use
the proceeds of the offering for the above purposes, we intend to invest the
funds in short-term and medium-term investment grade, interest bearing
securities. See Item 5. Operating and Financial Review and ProspectsLiquidity
and Capital Resources for additional information regarding our sources and
uses of capital.

ITEM 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, 2007. 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, 2007, 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, 2007.

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.

69

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ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

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

ITEM 16B. CODE OF ETHICS

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

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The
fees for professional services rendered by our auditors Kost Forer Gabbay & Kasierer, a member of
Ernst & Young Global, and to other global members of Ernst & Young
Global, for the fiscal years ended December 31, 2006 and 2007, are set below:

|                    |  |        |         |      |  |         | 
|------------------- |  | ------ | ------- | ---- |  | ------- | 
|Audit Fees
  Shamir |  | 2006   |         | 2007 | 
|                    |  |        |         |      | 
|                    |  | (in $) |        
|                   
|Audit fees          |  |        | 276,535 |      |  | 335,680 | 
|Audit-related fees  |  |        | -       |      |  | -       | 
|Tax fees            |  |        | 53,891  |      |  | 51,841  | 
|Other fees          |  |        | -       |      |  | -       | 
|                    |  |        |         |      | 
|Total               |  |        | 330,426 |      |  | 387,521 | 
|                    |  |        |         |      | 

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
April 26, 2007, 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.

Our
audit committee is responsible for assisting the board of directors in its
oversight of, among others, the independent auditors qualifications and
independence and the performance of the Companys internal audit function and
independent auditors. In accordance with the requirements of Israeli law, the
committee is responsible for or shall make recommendations regarding the
appointment, retention, evaluation, remuneration, independence, oversight and
termination of the work of the independent auditor employed by the Company
(including resolution of disagreements between management and the independent
auditor regarding financial reporting) for the purpose of preparing or issuing
an audit report or performing other audit, review or attest services for the
Company. The charter of the audit committee provides for a process with
respect to the prior approval of all services, including non-audit services, to
be performed by the independent auditors for Shamir.

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

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

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

Not
applicable.

70

---

---

PART III

ITEM 17. FINANCIAL STATEMENTS

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

ITEM 18. FINANCIAL STATMENTS

The
following financial statements, together with the reports of Kost Forer Gabbay
& Kasierer, a member of Ernst & Young Global, for the fiscal years
ended December 31, 2006 and 2007, 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, 2006 and 2007                                                      |  |      | F-
  3-4   | 
|Consolidated Statements of
  Income for the years ended December 31, 2005, 2006 and 2007                            |  |      | F-
  5     | 
|Consolidated Statements of
  Changes in Shareholders Equity for the years ended December 31, 2005, 2006
  and 2007 |  |      | F-
  6     | 
|Consolidated Statements of Cash
  Flows for the years ended December 31, 2005, 2006 and 2007                        |  |      | F-
  7-9   | 
|Notes to Consolidated Financial
  Statements                                                                        |  |      | F-
  10-49 | 

ITEM 19. EXHIBITS

See Exhibit Index.

71

---

---

SHAMIR OPTICAL INDUSTRY LTD. 
AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2007

IN U.S. DOLLARS

INDEX

|                                                             |  |            
|------------------------------------------------------------ |  | -----------
|                                                             |  | Page       
|                                                             |  |            
|                                                             |  |            
|Report of Independent Registered Public
  Accounting Firm    |  | F-2        
|                                                             |  |            
|Consolidated Balance Sheets                                  |  | F-3 - F-4  
|                                                             |  |            
|Consolidated Statements of Income                            |  | F-5        
|                                                             |  |            
|Consolidated Statements of Changes in
  Shareholders Equity |  | F-6        
|                                                             |  |            
|Consolidated Statements of Cash Flows                        |  | F-7 - F-9  
|                                                             |  |            
|Notes to Consolidated Financial Statements                   |  | F-10 - F-49

---

---

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

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

SHAMIR OPTICAL INDUSTRY LTD.

We
have audited the accompanying consolidated balance sheets of Shamir Optical
Industry Ltd. (the Company) and its subsidiaries (collectively Shamir) as
of December 31, 2006 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, 2007. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In
our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2006 and 2007, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2007, in conformity with U.S. generally
accepted accounting principles.

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

|                 |  |                                                               
|---------------- |  | --------------------------------------------------------------
|Tel-Aviv, Israel |  | /s/ Kost, Forer, Gabbay & KasiererKOST FORER GABBAY & KASIERER
|June 26,
  2008  |  | 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, |        
|                                                                                                                                     |  |              |        
|                                                                                                                                     |  | 2006         |         | 2007 |  
|                                                                                                                                     |  |              |         |      |  
|                                                                                                                                     |  |              |         |      |   |         | 
|ASSETS                                                                                                                               |  |              |         |      |   |         | 
|                                                                                                                                     |  |              |         |      |   |         | 
|CURRENT ASSETS:                                                                                                                      |  |              |         |      |   |         | 
|Cash and cash equivalents                                                                                                            |  | $            | 23,205  |      | $ | 18,953  | 
|Marketable securities                                                                                                                |  |              | 16,911  |      |   | 14,375  | 
|Trade receivables (net of allowance for
  doubtful accounts of $ 1,053 and $ 2,140 at December 31, 2006 and 2007,
  respectively) *) |  |              | 23,903  |      |   | 30,719  | 
|Other accounts receivable and prepaid
  expenses *)                                                                                  |  |              | 5,667   |      |   | 7,523   | 
|Inventory                                                                                                                            |  |              | 27,898  |      |   | 27,972  | 
|                                                                                                                                     |  |              |         |      |   |         | 
|                                                                                                                                     |  |              |         |      |   |         | 
|Total current
  assets                                                                                                               |  |              | 97,584  |      |   | 99,542  | 
|                                                                                                                                     |  |              |         |      |   |         | 
|                                                                                                                                     |  |              |         |      |   |         | 
|LONG-TERM INVESTMENTS:                                                                                                               |  |              |         |      |   |         | 
|Severance pay fund                                                                                                                   |  |              | 2,542   |      |   | 3,089   | 
|Loan to related party *)                                                                                                             |  |              | 1,297   |      |   | -       | 
|Loan to others                                                                                                                       |  |              | 240     |      |   | -       | 
|Long-term receivables                                                                                                                |  |              | 912     |      |   | 1,299   | 
|Investments in affiliates and others                                                                                                 |  |              | 3,513   |      |   | 4,437   | 
|                                                                                                                                     |  |              |         |      |   |         | 
|                                                                                                                                     |  |              |         |      |   |         | 
|Total long-term
  investments                                                                                                        |  |              | 8,504   |      |   | 8,825   | 
|                                                                                                                                     |  |              |         |      |   |         | 
|                                                                                                                                     |  |              |         |      |   |         | 
|PROPERTY, PLANT AND EQUIPMENT, NET                                                                                                   |  |              | 28,368  |      |   | 39,170  | 
|                                                                                                                                     |  |              |         |      |   |         | 
|                                                                                                                                     |  |              |         |      |   |         | 
|OTHER ASSETS                                                                                                                         |  |              | 5,362   |      |   | 5,412   | 
|                                                                                                                                     |  |              |         |      |   |         | 
|                                                                                                                                     |  |              |         |      |   |         | 
|GOODWILL                                                                                                                             |  |              | 7,178   |      |   | 7,542   | 
|                                                                                                                                     |  |              |         |      |   |         | 
|                                                                                                                                     |  |              |         |      |   |         | 
|Total assets                                                                                                                         |  | $            | 146,996 |      | $ | 160,491 | 
|                                                                                                                                     |  |              |         |      |   |         | 

|   |                                                         
|-- | --------------------------------------------------------
|*) | 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, |        
|                                                                                                                                                                        |  |              |        
|                                                                                                                                                                        |  | 2006         |         | 2007 |  
|                                                                                                                                                                        |  |              |         |      |  
|                                                                                                                                                                        |  |              |         |      |   |         | 
|LIABILITIES AND SHAREHOLDERS
EQUITY                                                                                                                                    |  |              |         |      |   |         | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|CURRENT LIABILITIES:                                                                                                                                                    |  |              |         |      |   |         | 
|Short-term bank credit and loans                                                                                                                                        |  | $            | 13,654  |      | $ | 15,950  | 
|Current maturities of long-term loans and
  capital leases                                                                                                              |  |              | 4,428   |      |   | 7,689   | 
|Trade payables*)                                                                                                                                                        |  |              | 8,930   |      |   | 10,852  | 
|Accrued expenses and other liabilities *)                                                                                                                               |  |              | 11,544  |      |   | 12,735  | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|Total current liabilities                                                                                                                                               |  |              | 38,556  |      |   | 47,226  | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|LONG-TERM LIABILITIES:                                                                                                                                                  |  |              |         |      |   |         | 
|Long-term loans                                                                                                                                                         |  |              | 17,995  |      |   | 17,491  | 
|Capital leases                                                                                                                                                          |  |              | 4,304   |      |   | 4,303   | 
|Accrued severance pay                                                                                                                                                   |  |              | 2,828   |      |   | 3,337   | 
|Other long-term liabilities                                                                                                                                             |  |              | -       |      |   | 753     | 
|Deferred tax liabilities                                                                                                                                                |  |              | 1,287   |      |   | 1,358   | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|Total long-term
  liabilities                                                                                                                                           |  |              | 26,414  |      |   | 27,242  | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|MINORITY INTERESTS                                                                                                                                                      |  |              | 2,223   |      |   | 800     | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|COMMITMENTS AND CONTINGENT LIABILITIES                                                                                                                                  |  |              |         |      |   |         | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|SHAREHOLDERS EQUITY:                                                                                                                                                   |  |              |         |      |   |         | 
|Share capital -                                                                                                                                                         |  |              |         |      |   |         | 
|Ordinary shares of NIS 0.01 par value -                                                                                                                                 |  |              |         |      |   |         | 
|Authorized: 100,000,000 shares at December
  31, 2006 and 2007; Issued and outstanding: 16,256,514 and 16,423,740 shares
  at December 31, 2006 and 2007, respectively. |  |              | 37      |      |   | 37      | 
|Additional paid-in capital                                                                                                                                              |  |              | 65,599  |      |   | 66,629  | 
|Accumulated other comprehensive income                                                                                                                                  |  |              | 958     |      |   | 1,628   | 
|Retained earnings                                                                                                                                                       |  |              | 13,209  |      |   | 16,929  | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|Total
  shareholders equity                                                                                                                                            |  |              | 79,803  |      |   | 85,223  | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|                                                                                                                                                                        |  |              |         |      |   |         | 
|Total liabilities
  and shareholders equity                                                                                                                            |  | $            | 146,996 |      | $ | 160,491 | 
|                                                                                                                                                                        |  |              |         |      |   |         | 

|   |                                                         
|-- | --------------------------------------------------------
|*) | 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, |       
|                                                |  |                         |       
|                                                |  | 2005                    |        | 2006 |   | 2007   |  
|                                                |  |                         |        |      |   |        |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|Revenues, net *)                                |  | $                       | 80,364 |      | $ | 97,280 |   | $ | 120,419 |  
|Cost of revenues *)                             |  |                         | 36,030 |      |   | 44,038 |   |   | 55,856  |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|Gross profit                                    |  |                         | 44,334 |      |   | 53,242 |   |   | 64,563  |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|Operating expenses:                             |  |                         |        |      |   |        |   |   |         |  
|Research and development                        |  |                         | 1,688  |      |   | 2,372  |   |   | 2,564   |  
|Selling and marketing                           |  |                         | 23,663 |      |   | 32,798 |   |   | 36,552  |  
|General and administrative                      |  |                         | 6,887  |      |   | 10,986 |   |   | 13,549  |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|Total operating expenses *)                     |  |                         | 32,238 |      |   | 46,156 |   |   | 52,665  |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|Operating income                                |  |                         | 12,096 |      |   | 7,086  |   |   | 11,898  |  
|Financial and other income (expenses), net
  *) |  |                         | 401    |      |   | (159   | ) |   | (239    | )
|                                                |  |                         |        |      |   |        |   |   |         |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|Income before taxes on income                   |  |                         | 12,497 |      |   | 6,927  |   |   | 11,659  |  
|Taxes on income                                 |  |                         | 4,504  |      |   | 2,179  |   |   | 5,013   |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|Income after taxes on income                    |  |                         | 7,993  |      |   | 4,748  |   |   | 6,646   |  
|Equity in gains (losses) of affiliates, net     |  |                         | -      |      |   | (245   | ) |   | 46      |  
|Minority interest in losses of subsidiaries     |  |                         | 112    |      |   | 1,957  |   |   | 1,509   |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|Net income                                      |  | $                       | 8,105  |      | $ | 6,460  |   | $ | 8,201   |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|Net earnings per share:                         |  |                         |        |      |   |        |   |   |         |  
|Basic                                           |  | $                       | 0.52   |      | $ | 0.40   |   | $ | 0.50    |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|                                                |  |                         |        |      |   |        |   |   |         |  
|Diluted                                         |  | $                       | 0.51   |      | $ | 0.39   |   | $ | 0.50    |  
|                                                |  |                         |        |      |   |        |   |   |         |  

|   |                                                         
|-- | --------------------------------------------------------
|*) | 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 CHANGES IN SHAREHOLDERS EQUITY
|                                                          
|U.S. dollars in thousands (except share data)             

|                                                                                              |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   |   |       |   |   |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | --------------- | - | ------------------------------- | - | ------------------------------- | ------ | -------------------------------------------- | - | ------------------- | - | ------------------------------ | ----------- | ------------------------------ | - | ------ | - | - | ----- | - | - | ------ | -
|                                                                                              |  | Number
  of shares |            | Share
  capital |   | Additional
  paid-in 
  capital |   | Deferred
  stock
  compensation |        | Accumulated
  other
  comprehensive
  income |   | Retained
  earnings |   | Total
  comprehensive
  income |             | Total
  shareholders
  equity |  
|                                                                                              |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |  
|                                                                                              |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   |   |       |   |   |        |  
|Balance as of January 1, 2005                                                                 |  |                    | 12,208,932 |                 | $ | 29                              |   | $                               | 10,053 |                                              | $ | (844                | ) | $                              | **)
  1,236 |                                | $ | 4,156  |   |   |       |   | $ | 14,630 |  
|Issuance of shares, net in the IPO                                                            |  |                    | 3,400,000  |                 |   | 8                               |   |                                 | 43,720 |                                              |   | -                   |   |                                | -           |                                |   | -      |   |   |       |   |   | 43,728 |  
|Issuance of shares in respect of acquisition of
additional share of
  SII                     |  |                    | 145,182    |                 |   | *)  -                           |   |                                 | 2,155  |                                              |   | -                   |   |                                | -           |                                |   | -      |   |   |       |   |   | 2,155  |  
|Reclassification of puttable shares from temporary
equity                                     |  |                    | 502,400    |                 |   | *)
  -                          |   |                                 | 3,000  |                                              |   | -                   |   |                                | -           |                                |   | -      |   |   |       |   |   | 3,000  |  
|Reclassification of retained earnings into
additional paid-in capital
  due to reorganization |  |                    | -          |                 |   | -                               |   |                                 | 5,512  |                                              |   | -                   |   |                                | -           |                                |   | (5,512 | ) |   |       |   |   | -      |  
|Deferred stock compensation related to grant of
options to employees                          |  |                    | -          |                 |   | -                               |   |                                 | 338    |                                              |   | (338                | ) |                                | -           |                                |   | -      |   |   |       |   |   | -      |  
|Amortization of deferred stock
compensation                                                   |  |                    | -          |                 |   | -                               |   |                                 | -      |                                              |   | 300                 |   |                                | -           |                                |   | -      |   |   |       |   |   | 300    |  
|Compensation expenses in respect of options granted
in subsidiarys
  share                   |  |                    | -          |                 |   | -                               |   |                                 | 277    |                                              |   | -                   |   |                                | -           |                                |   | -      |   |   |       |   |   | 277    |  
|Comprehensive income:                                                                         |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   |   |       |   |   |        |  
|Foreign currency translation adjustments                                                      |  |                    | -          |                 |   | -                               |   |                                 | -      |                                              |   | -                   |   |                                | (807        | )                              |   | -      |   | $ | (807  | ) |   | (807   | )
|Net income                                                                                    |  |                    | -          |                 |   | -                               |   |                                 | -      |                                              |   | -                   |   |                                | -           |                                |   | 8,105  |   |   | 8,105 |   |   | 8,105  |  
|                                                                                              |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   |   |       |   |   |        |  
|Total comprehensive income                                                                    |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   | $ | 7,298 |   |   |        |  
|                                                                                              |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   |   |       |   |   |        |  
|Balance as of December 31, 2005                                                               |  |                    | 16,256,514 |                 |   | 37                              |   |                                 | 65,055 |                                              |   | (882                | ) |                                | **)
  429   |                                |   | 6,749  |   |   |       |   |   | 71,388 |  
|Compensation in respect of options to
employees                                               |  |                    | -          |                 |   | -                               |   |                                 | (882   | )                                            |   | 882                 |   |                                | -           |                                |   | -      |   |   |       |   |   | -      |  
|Stock based compensation related to options granted
to employees and
  consultants            |  |                    | -          |                 |   | -                               |   |                                 | 1,426  |                                              |   | -                   |   |                                | -           |                                |   | -      |   |   |       |   |   | 1,426  |  
|Comprehensive income:                                                                         |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   |   |       |   |   |        |  
|Foreign currency translation adjustments                                                      |  |                    | -          |                 |   | -                               |   |                                 | -      |                                              |   | -                   |   |                                | 548         |                                |   | -      |   | $ | 548   |   |   | 548    |  
|Unrealized loss on short-term investments, net of
tax                                         |  |                    | -          |                 |   | -                               |   |                                 | -      |                                              |   | -                   |   |                                | (19         | )                              |   | -      |   |   | (19   | ) |   | (19    | )
|Net income                                                                                    |  |                    | -          |                 |   | -                               |   |                                 | -      |                                              |   | -                   |   |                                | -           |                                |   | 6,460  |   |   | 6,460 |   |   | 6,460  |  
|                                                                                              |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   |   |       |   |   |        |  
|Total comprehensive income                                                                    |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   | $ | 6,989 |   |   |        |  
|                                                                                              |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   |   |       |   |   |        |  
|Balance as of December 31, 2006                                                               |  |                    | 16,256,514 |                 |   | 37                              |   |                                 | 65,599 |                                              |   | -                   |   |                                | ***)
  958  |                                |   | 13,209 |   |   |       |   |   | 79,803 |  
|Cumulative impact of change in accounting for
uncertainties in income
  taxes (FIN 48)        |  |                    | -          |                 |   | -                               |   |                                 | -      |                                              |   | -                   |   |                                | -           |                                |   | (481   | ) |   |       |   |   | (481   | )
|Distribution of earnings to shareholders ($0.244
per share)                                   |  |                    | -          |                 |   | -                               |   |                                 | -      |                                              |   | -                   |   |                                | -           |                                |   | (4,000 | ) |   |       |   |   | (4,000 | )
|Stock-based compensation related to options to
employees and
  consultants                    |  |                    | -          |                 |   | -                               |   |                                 | 1,030  |                                              |   | -                   |   |                                | -           |                                |   | -      |   |   |       |   |   | 1,030  |  
|Exercise of options granted to employees                                                      |  |                    | 167,226    |                 |   | *                               | ) |                                 | -      |                                              |   | -                   |   |                                | -           |                                |   | -      |   |   |       |   |   | *      | )
|Comprehensive income:                                                                         |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   |   |       |   |   |        |  
|Foreign currency translation adjustments                                                      |  |                    | -          |                 |   | -                               |   |                                 | -      |                                              |   | -                   |   |                                | 620         |                                |   | -      |   | $ | 620   |   |   | 620    |  
|Unrealized gain on short-term investments, net of
tax                                         |  |                    | -          |                 |   | -                               |   |                                 | -      |                                              |   | -                   |   |                                | 50          |                                |   | -      |   |   | 50    |   |   | 50     |  
|Net income                                                                                    |  |                    | -          |                 |   | -                               |   |                                 | -      |                                              |   | -                   |   |                                | -           |                                |   | 8,201  |   |   | 8,201 |   |   | 8,201  |  
|                                                                                              |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   |   |       |   |   |        |  
|Total comprehensive income                                                                    |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   | $ | 8,871 |   |   |        |  
|                                                                                              |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   |   |       |   |   |        |  
|Balance as of December 31, 2007                                                               |  |                    | 16,423,740 |                 |   | 37                              |   | $                               | 66,629 |                                              | $ | -                   |   | $                              | ***)1,628   |                                | $ | 16,929 |   |   |       |   | $ | 85,223 |  
|                                                                                              |  |                    |            |                 |   |                                 |   |                                 |        |                                              |   |                     |   |                                |             |                                |   |        |   |   |       |   |   |        |  

|     |                                                                                                                                                                                                                                                        
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*)   | Represent an amount lower
  than $1.                                                                                                                                                                                                                   
|**)  | The full amount represents
  foreign currency translation adjustments.                                                                                                                                                                                 
|***) | Represent an amount of $ 977
  and $ 1,597 foreign currency translation adjustment as of December 31, 2006
  and 2007 respectively, and $ (19) loss and $ 31 gain on short-term investment,
  net of tax as of December 31, 2006 and 2007 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, |        
|                                                                                                       |  |                         |        
|                                                                                                       |  | 2005                    |         | 2006 |   | 2007    |  
|                                                                                                       |  |                         |         |      |   |         |  
|                                                                                                       |  |                         |         |      |   |         |   |   |         |  
|Cash flows from operating activities:                                                                  |  |                         |         |      |   |         |   |   |         |  
|Net income                                                                                             |  | $                       | 8,105   |      | $ | 6,460   |   | $ | 8,201   |  
|Adjustments required to reconcile net
  income to net cash provided by (used in) operating activities: |  |                         |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                                          |  |                         | 4,729   |      |   | 6,250   |   |   | 6,152   |  
|Stock based compensation                                                                               |  |                         | 608     |      |   | 1,426   |   |   | 1,030   |  
|Accrued severance pay, net                                                                             |  |                         | (60     | )    |   | 62      |   |   | (52     | )
|Currency fluctuations of long-term loans                                                               |  |                         | (672    | )    |   | 166     |   |   | 526     |  
|Decrease (increase) in deferred tax assets,
  net                                                      |  |                         | 85      |      |   | (1,987  | ) |   | 1,317   |  
|Equity in losses (gains) of affiliates,
net                                                            |  |                         | -       |      |   | 245     |   |   | (46     | )
|Minority interest in losses of
subsidiaries                                                            |  |                         | (112    | )    |   | (1,957  | ) |   | (1,509  | )
|Interest receivable on marketable
  securities                                                         |  |                         | -       |      |   | (190    | ) |   | 85      |  
|Foreign currency translation losses
(gains)                                                            |  |                         | 712     |      |   | (604    | ) |   | (1,239  | )
|Increase in trade receivables                                                                          |  |                         | (3,128  | )    |   | (4,852  | ) |   | (4,915  | )
|Increase in other accounts receivable and
  prepaid expenses and in long term receivables              |  |                         | (264    | )    |   | (1,598  | ) |   | (2,016  | )
|Decrease (increase) in inventory                                                                       |  |                         | (5,343  | )    |   | (6,210  | ) |   | 2,825   |  
|Increase (decrease) in trade payables                                                                  |  |                         | 3,786   |      |   | (97     | ) |   | 989     |  
|Increase in accrued expenses and other
  liabilities                                                   |  |                         | 1,691   |      |   | 1,696   |   |   | 184     |  
|Others                                                                                                 |  |                         | (135    | )    |   | 175     |   |   | 213     |  
|                                                                                                       |  |                         |         |      |   |         |   |   |         |  
|                                                                                                       |  |                         |         |      |   |         |   |   |         |  
|Net cash provided by (used in) operating
  activities                                                  |  |                         | 10,002  |      |   | (1,015  | ) |   | 11,745  |  
|                                                                                                       |  |                         |         |      |   |         |   |   |         |  
|Cash flows from investing activities:                                                                  |  |                         |         |      |   |         |   |   |         |  
|Loans granted to affiliates                                                                            |  |                         | (13     | )    |   | (723    | ) |   | (909    | )
|Loans granted to others                                                                                |  |                         | -       |      |   | (240    | ) |   | -       |  
|Investment in affiliates                                                                               |  |                         | -       |      |   | (2,356  | ) |   | (292    | )
|Acquisition of Altra Turkey (a)                                                                        |  |                         | (2,568  | )    |   | -       |   |   | -       |  
|Acquisition of additional shares in SII in
  2005                                                      |  |                         | (2,077  | )    |   | -       |   |   | -       |  
|Additional consideration on SII acquisition
  in 2005 (see Note 1d)                                    |  |                         | -       |      |   | -       |   |   | (449    | )
|Acquisition of Spherical Optics (b)                                                                    |  |                         | -       |      |   | (849    | ) |   | -       |  
|Acquisition of Shamir Or                                                                               |  |                         | -       |      |   | (27     | ) |   | -       |  
|Acquisition of Shamir Israel (c)                                                                       |  |                         | -       |      |   | -       |   |   | 30      |  
|Purchase of property, plant and equipment                                                              |  |                         | (5,909  | )    |   | (7,281  | ) |   | (13,375 | )
|Purchase of intangible assets                                                                          |  |                         | -       |      |   | -       |   |   | (331    | )
|Government participation in purchase of
  property, plant and equipment                                |  |                         | 83      |      |   | -       |   |   | -       |  
|Proceeds from sale of property and
  equipment                                                         |  |                         | 77      |      |   | 74      |   |   | 489     |  
|Loan granted to related party                                                                          |  |                         | (136    | )    |   | (986    | ) |   | -       |  
|Repayment of loan by related party                                                                     |  |                         | 105     |      |   | -       |   |   | 1,297   |  
|Purchase of marketable securities and other
  short-term investments                                   |  |                         | (14,350 | )    |   | (29,666 | ) |   | (20,352 | )
|Proceeds from sale of marketable securities
  and other short-term investments                         |  |                         | -       |      |   | 27,504  |   |   | 22,886  |  
|                                                                                                       |  |                         |         |      |   |         |   |   |         |  
|                                                                                                       |  |                         |         |      |   |         |   |   |         |  
|Net cash used in investing activities                                                                  |  |                         | (24,788 | )    |   | (14,550 | ) |   | (11,006 | )
|                                                                                                       |  |                         |         |      |   |         |   |   |         |  

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, |       
|                                                                                           |  |                         |       
|                                                                                           |  | 2005                    |        | 2006 |   | 2007   |  
|                                                                                           |  |                         |        |      |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Cash flows from financing activities:                                                      |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Distribution of earnings to shareholders                                                   |  |                         | (5,201 | )    |   | -      |   |   | (4,000 | )
|Short-term bank credit and loans, net                                                      |  |                         | (1,173 | )    |   | 3,975  |   |   | 702    |  
|Issuance of shares, net                                                                    |  |                         | 42,571 |      |   | -      |   |   | -      |  
|Receipt of long-term loans                                                                 |  |                         | 5,638  |      |   | 12,290 |   |   | 3,091  |  
|Repayment of long-term loans                                                               |  |                         | (4,031 | )    |   | (3,949 | ) |   | (3,236 | )
|Repayment of long-term loans in capital
  lease                                            |  |                         | (1,274 | )    |   | (1,380 | ) |   | (1,956 | )
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Net cash provided by (used in) financing
  activities                                      |  |                         | 36,530 |      |   | 10,936 |   |   | (5,399 | )
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Effect of exchange rate differences on cash
  and cash equivalents                         |  |                         | (477   | )    |   | 332    |   |   | 408    |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Increase (decrease) in cash and cash
  equivalents                                         |  |                         | 21,267 |      |   | (4,297 | ) |   | (4,252 | )
|Cash and cash equivalents at beginning of
  year                                           |  |                         | 6,235  |      |   | 27,502 |   |   | 23,205 |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Cash and cash equivalents at end of year                                                   |  | $                       | 27,502 |      | $ | 23,205 |   | $ | 18,953 |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Supplemental information and disclosures of
  non-cash investing and financing activities: |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Issuance of shares as partial consideration
  of SII acquisition                           |  | $                       | 2,155  |      | $ | -      |   | $ | -      |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Deferred tax benefit on offering expense                                                   |  | $                       | 1,453  |      | $ | -      |   | $ | -      |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Purchase of property, plant and equipment
  in capital lease                               |  | $                       | 1,951  |      | $ | 5,343  |   | $ | 1,898  |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Purchase of intangible assets to be paid in
  future periods                               |  | $                       | -      |      | $ | -      |   | $ | 564    |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Additional
  consideration on SII acquisition in 2005 (see Note 1d)                        |  | $                       | -      |      | $ | 449    |   | $ | 139    |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Grant
  from the Portuguese government                                                     |  | $                       | -      |      | $ | -      |   | $ | 611    |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Grant
  from the Israeli government (see Note 15 d)                                        |  | $                       | -      |      | $ | -      |   | $ | 189    |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Consideration
  on SII additional acquisition in 2007 (see Note 1d)                        |  | $                       | -      |      | $ | -      |   | $ | 427    |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Long-term
  loan written off (see Note 1b)                                                 |  | $                       | -      |      | $ | 355    |   | $ | -      |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Cash paid during the period for:                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Interest                                                                                   |  | $                       | 1,038  |      | $ | 1,646  |   | $ | 1,747  |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  
|Income taxes                                                                               |  | $                       | 3,114  |      | $ | 3,666  |   | $ | 5,383  |  
|                                                                                           |  |                         |        |      |   |        |   |   |        |  

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, |      
|    |                                                                                                                                                 |  |                         |      
|    |                                                                                                                                                 |  | 2005                    |       | 2006 |   | 2007 |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |  
|(a) | Acquisition of Altra Turkey:                                                                                                                    |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    | Fair value of assets acquired at the
  acquisition date:                                                                                        |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    | Working capital (excluding cash and cash
  equivalents)                                                                                         |  | $                       | 541   |      |   |      |   |   |      |  
|    | Property and equipment                                                                                                                          |  |                         | 979   |      |   |      |   |   |      |  
|    | Other intangible assets                                                                                                                         |  |                         | 733   |      |   |      |   |   |      |  
|    | Goodwill                                                                                                                                        |  |                         | 315   |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  | $                       | 2,568 |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|(b) | Acquisition ofSpherical Optics (PTY)
  Ltd:                                                                                                     |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    | Fair value of assets acquired at the
  acquisition date:                                                                                        |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    | Working capital (excluding cash and cash
  equivalents)                                                                                         |  |                         |       |      | $ | 579  |   |   |      |  
|    | Property and equipment                                                                                                                          |  |                         |       |      |   | 28   |   |   |      |  
|    | Other intangible assets                                                                                                                         |  |                         |       |      |   | 652  |   |   |      |  
|    | Goodwill                                                                                                                                        |  |                         |       |      |   | 70   |   |   |      |  
|    | Long-term deferred tax liabilities                                                                                                              |  |                         |       |      |   | (171 | ) |   |      |  
|    | Minority interest                                                                                                                               |  |                         |       |      |   | (309 | ) |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      | $ | 849  |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|(c) | Acquisition ofShamir Israel Optical
  Marketing Ltd:                                                                                            |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    | Estimated fair value of assets acquired at
  the acquisition date:                                                                              |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    | Working capital (excluding cash and cash
  equivalents)                                                                                         |  |                         |       |      |   |      |   | $ | 96   |  
|    | Long-term deferred tax assets                                                                                                                   |  |                         |       |      |   |      |   |   | 167  |  
|    | Property and equipment                                                                                                                          |  |                         |       |      |   |      |   |   | 44   |  
|    | Other intangible assets                                                                                                                         |  |                         |       |      |   |      |   |   | 153  |  
|    | Goodwill                                                                                                                                        |  |                         |       |      |   |      |   |   | 128  |  
|    | Long-term loans and other long-term
  liabilities                                                                                               |  |                         |       |      |   |      |   |   | (215 | )
|    | Long-term deferred tax liabilities                                                                                                              |  |                         |       |      |   |      |   |   | (38  | )
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    | Net assets acquired                                                                                                                             |  |                         |       |      |   |      |   |   | 335  |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    | Investment in Shamir Israel Optical
  Marketing Ltd. prior to acquisition that was accounted for by
  the equity method and shareholders loans |  |                         |       |      |   |      |   |   | (365 | )
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  
|    |                                                                                                                                                 |  |                         |       |      |   |      |   | $ | (30  | )
|    |                                                                                                                                                 |  |                         |       |      |   |      |   |   |      |  

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

F-9

---

---

SHAMIR OPTICAL INDUSTRY LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)


|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-------- | ------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | a.      | General:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |         | Shamir
  Optical Industry Ltd. (the Company) was incorporated under the laws of the
  State of Israel in the early 1970s. Shamir and its subsidiaries (collectively
  - Shamir) design, develop, manufacture and market optical progressive and
  other lenses and molds. As of December 31, 2007, Shamir had 15 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, Shamir 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). On
  March 6, 2005, in connection with its IPO, the Company changed its legal
  structure from an Agricultural Cooperative Society (ACS) into an Israeli
  limited liability company (LLC).                                                                                                                                                                            
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |         | Most of the
  raw materials used in the manufacture of lenses, including Shamirs products,
  are available from a limited number of suppliers. Shamir purchases its raw
  materials from some of these suppliers. The loss of any one of these
  suppliers, or a significant decrease in the supply of glass blanks or
  monomers, would require Shamir to obtain these raw materials elsewhere. If
  Shamir is unable to obtain glass blanks or monomers from its suppliers (or
  alternative suppliers) at acceptable prices, Shamir may realize lower margins
  and experience difficulty in meeting its customers requirements.
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | b.      | Acquisition
  of Cambridge Optical Group Limited (Cambridge):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |         | On
  August 31, 2004, Altra acquired all of the outstanding shares of Cambridge, a
  UK based company. Altra paid ₤ 1,500 thousand (approximately $ 2,700).
  Under the terms of the acquisition agreement, contingent cash payments were
  supposed to be paid if certain financial performance criteria with respect to
  Cambridge were met in three years from the acquisition date. As of August 31,
  2007 (the end of the period), the financial performance criteria were not
  met.                                                                                                                                         
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |         | During
  2006, part of the long-term loan that was part of the liabilities assumed was
  written off. Accordingly the goodwill was reduced by $ 355.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | c.      | Acquisition
  of Altra
  Optik Sanayi ve Ticaret A.S. (Altra Turkey)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |         | On
  June 27, 2005, Altra established a new Turkish optical subsidiary, Altra
  Altra Turkey. Altra Turkey acquired all the assets of Emin Optic, a Turkish
  company that engaged in the business of producing spectacle lenses. Altra
  Turkey paid New Turkish ₤ 3,430
  thousand ($ 2,568).                                                                                                                                                                                                                                                                                                                                      
|         |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |         | The
  asset purchase was accounted for as a business combination by the purchase
  method and, accordingly, the purchase price has been allocated to the fair
  value of the assets acquired. The results of Altra Turkey operations have
  been included in the consolidated financial statements of Shamir
  starting June 30, 2005.                                                                                                                                                                                                                                                                                               

F-10

---

---

SHAMIR OPTICAL INDUSTRY LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)


|         |                 |                                                                                                          
|-------- | --------------- | ---------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |                                                                                                          
|         |                 | With
  the establishment of Altra Turkey, Shamir
  expanded its customer base and its presence in Europe.
|         |                 |                                                                                                          
|         |                 | The
  following table summarizes the fair values of the assets acquired:                                 

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Acquired
  other identifiable intangible assets in the amount of $ 733 with definite
  lives are amortized using the straight-line method at an annual weighted
  average rate of 31%.                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Pro
  forma information was not provided due to immateriality.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | d. | Additional
  acquisition of shares of SII:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | On
  April 14, 2005, Shamir acquired an additional 2.0% of the ownership interest
  and the voting power in SII, the American distribution center of Shamir, for
  the amount of $ 183, increasing its ownership interest to 58.7%.                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | On
  July 31, 2005, Shamir signed an agreement to purchase an additional 31.3%
  stake in SII, increasing Shamirs ownership interest in SII to 90%. The
  transaction consideration was approximately $ 1,894 in cash and 145,182 shares
  of Shamir valued at approximately $ 2,155 in newly issued Ordinary shares of the Company. Under the terms of
  the agreement, annual contingent cash payments will be paid, for a period of
  five years, if certain financial performance criteria are met in respect of
  future earnings of SII in that period. The transaction was closed on
  September 30, 2005.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The
  additional consideration regarding this purchase in respect of 2006 and 2007
  earnings is $ 449 and $ 139 respectively, and as of December 31, 2006 and 2007,
  the goodwill increased accordingly.                                                                                                                                                                                                                                                                                                                                                                                                        

F-11

---

---

SHAMIR OPTICAL INDUSTRY LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)


|         |                 |                                                                                                                                                              
|-------- | --------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:- | GENERAL (Cont.)
|         |                 |                                                                                                                                                              
|         |                 | The
  following table summarizes the fair values of the assets acquired,
  liabilities assumed and the buyout of the minority interest as of July 31,
  2005:

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

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Acquired distribution
  channels and trade name assets in the amount of $ 1,694 with definite lives
  are amortized using the straight-line method at an annual weighted average
  rate of 20%.                                                                                                                                                                                                                                                                                            
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | On
  July 17, 2007, Shamir signed an agreement to purchase an additional 10% of
  the outstanding shares of SII, increasing Shamir 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 revenues in the years 2007 to 2010. Therefore, as of December 31, 2007,
  Shamir recorded a liability in the amount of $ 427 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 earnings
  is $ 18, and as of December 31, 2007, the goodwill increased accordingly.                                                                                                                                                                                                                                                                                                                             
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | The
  acquisition was accounted for by the purchase method and, accordingly, the
  purchase price has been allocated to the estimated fair value of the assets
  acquired and liabilities assumed of SII. 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 on
  a critical distribution channel in the U.S.A.                                                                                                                                                                                                                                                                                                                                                        
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Pro-forma
  information was not provided due to immateriality.                                                                                                                                                                                                                                                                                                                                                                                                                             

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.)
|         |                 |                                                                                                                                                                                                                                                                                                                                        
|         | e.              | 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
  asset purchase 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. 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.                                                                                                                                                                                                                             
|         |                 |                                                                                                                                                                                                                                                                                                                                        
|         |                 | The
  following table summarizes the estimated fair values of the assets acquired
  and liabilities assumed:                                                                                                                                                                                                                           

|                                   |  |   |       |  
|---------------------------------- |  | - | ----- | -
|Current
  assets                   |  | $ | 1,249 |  
|Property and
  equipment           |  |   | 28    |  
|Long-term
  deferred tax assets    |  |   | 19    |  
|Customer
  relationship            |  |   | 633   |  
|Goodwill                           |  |   | 70    |  
|                                   |  |   |       |  
|                                   |  |   |       |  
|Total assets
  acquired            |  |   | 1,999 |  
|                                   |  |   |       |  
|                                   |  |   |       |  
|Current
  liabilities              |  |   | (664  | )
|Long-term
  deferred tax liability |  |   | (171  | )
|                                   |  |   |       |  
|                                   |  |   |       |  
|Total
  liabilities assumed        |  |   | (835  | )
|                                   |  |   |       |  
|                                   |  |   |       |  
|Net assets
  acquired              |  |   | 1,164 |  
|                                   |  |   |       |  
|                                   |  |   |       |  
|Minority
  interest                |  |   | (309  | )
|                                   |  |   |       |  
|                                   |  |   |       |  
|Total
  purchase price             |  | $ | 855   |  
|                                   |  |   |       |  

| |  |                                                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Acquired other intangible
  assets in the amount of $ 633 with definite lives are amortized using the
  straight-line method at an annual rate of 14%.
| |  |                                                                                                                                                       
| |  | Pro forma information was
  not provided due to immateriality.                                                                                        

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 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 generally accepted accounting
  principles requires management to make estimates and assumptions that affect
  the amounts reported in the financial statements and accompanying notes.
  Actual results could differ from those estimates.                                                                                                                                                 
|         |                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | b.                                                                                                                                     | Financial statements in
  U.S. dollars:                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                                                                                                                        | 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.
|         |                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | c.                                                                                                                                     | Principles of
  consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                                                                                                                        | The consolidated financial
  statements include the accounts of the Company and its wholly and majority
  owned subsidiaries. Intercompany transactions and balances including profit
  from intercompany sales not yet realized outside Shamir, have been eliminated
  upon consolidation.                                                                                                                                                              
|         |                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | d.                                                                                                                                     | Cash equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                                                                                                                        | Cash equivalents are
  short-term highly liquid investments that are readily convertible to cash
  with maturities of three months or less at the date acquired.                                                                                                                                                                                                                                                                                         

F-14

---

---

SHAMIR OPTICAL INDUSTRY LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share and per share data)


|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------- | ----------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT
  ACCOUNTING POLICIES (Cont.)
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | e.                                        | 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. At December 31, 2007 and 2006, all
  marketable securities covered by SFAS No. 115 were designated as
  available-for-sale. Accordingly, these securities are stated at fair value,
  with unrealized gains and losses, net of tax, reported in accumulated other
  comprehensive income, a separate component of shareholders equity. The
  amortized cost of available-for-sale securities is adjusted for amortization
  of premiums to maturity. Such amortization and interest are included in
  financial and other income (expenses), net.                                                                                                                                             
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                           | 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) provides guidance for
  determining when an investment is considered impaired, whether impairment is
  other-than-temporary, and measurement of an impairment loss. An investment is
  considered impaired if the fair value of the investment is less than its
  cost. If, after consideration of all available evidence to evaluate the
  realizable value of its investment, impairment is determined to be
  other-than-temporary, then an impairment loss should be recognized equal to
  the difference between the investments cost and its fair value.
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                           | During 2007,
  2006 and 2005, no impairment losses were identified in accordance with FSP
  115-1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | f.                                        | Inventories:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                           | Inventories are stated at
  the lower of cost or market value. Cost is determined as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                           | Raw materials and
  work-in-progress - using the 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. Inventory provisions have been included in the cost of revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | g.                                        | Investments in affiliates
  and others:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                           | Affiliated companies are
  companies held to the extent of 20% or more (which are not subsidiaries),
  over which Shamir can exercise significant influence on their operating and
  financial policies of the affiliate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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.)
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |      |                                                                                                                                                                                                                         
|         |                                           | 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 10 years, commencing from the acquisition
  date.                                                                                                                                            
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |      |                                                                                                                                                                                                                         
|         |                                           | Goodwill embedded in an
  equity method investment is not amortized. Instead, it is subject to other
  than temporary impairment assessment together with the entire carrying value
  of the investment.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |      |                                                                                                                                                                                                                         
|         |                                           | Investments in companies
  in which 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, 2007, no impairment losses have been identified.
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |      |                                                                                                                                                                                                                         
|         | h.                                        | Property, plant and
  equipment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |      |                                                                                                                                                                                                                         
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | I.   | Property, plant and
  equipment are stated at cost, net of accumulated depreciation and investment
  grants.                                                                                                            
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |      |                                                                                                                                                                                                                         
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | II.  | 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.
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |      |                                                                                                                                                                                                                         
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | III. | 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.

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.)
|         |                                         |                                                                                                                                                                                                                                                                                          
|         | i.                                      | Other
  intangible assets, net:                                                                                                                                                                                                                                                          
|         |                                         |                                                                                                                                                                                                                                                                                          
|         |                                         | Intangible
  assets are amortized over their useful lives using a method of amortization
  that reflects the pattern in which the economic benefits of the intangible
  assets are consumed or otherwise used, in accordance with SFAS No. 142,
  Goodwill and Other Intangible Assets.
|         |                                         |                                                                                                                                                                                                                                                                                          
|         |                                         | Amortization
  is calculated using the straight-line method over the estimated useful lives
  at the following annual rates:                                                                                                                                                             

|                      |  |                    |    | 
|--------------------- |  | ------------------ | -- | 
|                      |  | Weighted average % |   
|                      |  |                    |   
|                      |  |                    |    | 
|Technology            |  |                    | 23 | 
|Customer relationship |  |                    | 20 | 
|Non competition       |  |                    | 33 | 
|Distribution channels |  |                    | 20 | 
|Patents               |  |                    | 10 | 
|Trade name            |  |                    | 20 | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | j. | Impairment
  of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Shamirs long-lived assets
  are reviewed for impairment in accordance with SFAS No. 144, Accounting
  for the Impairment or Disposal of Long-Lived Assets, whenever events or
  changes in circumstances indicate that the carrying amount of an asset may
  not be recoverable. Recoverability of assets to be held and used is measured
  by a comparison of the carrying amount of an asset to the future undiscounted
  cash flows expected to be generated by the asset. If such assets are
  considered to be impaired, the impairment to be recognized is measured by the
  amount by which the carrying amount of the assets exceeds the fair value of
  the assets. Assets to be disposed of are reported at the lower of the
  carrying amount or fair value less costs to sell. During 2007, 2006 and 2005,
  no impairment losses have been identified.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | k. | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Goodwill represents excess
  of the costs over the net assets of businesses acquired. SFAS No. 142
  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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.)
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                           | Fair value is determined
  using Shamirs market capitalization. Shamir performs the impairment tests
  during the fourth fiscal quarter. During 2007, 2006 and 2005, no impairment
  losses have been identified.                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | l.                                        | Revenue recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                           | Shamir derives its
  revenues from sales of lenses and from design services to third party lens
  manufacturers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                           | Revenues from sale of
  lenses are recognized in accordance with Staff Accounting Bulletin (SAB)
  No. 104, Revenue Recognition in Financial Statements, when delivery has
  occurred, persuasive evidence of an agreement exists, the vendors fee is
  fixed or determinable, no further obligation exists and collectibility is
  probable.                                                                                                                                                                                                                                                            
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                           | Shamir has various
  programs that allow opticians to earn rebates on their accumulated purchases.
  Rebates are recognized as a reduction of revenues, in accordance with EITF
  No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
  (Including a Reseller of the Vendors Products).                                                                                                                                                                                                                                                                                                 
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                           | Design services are
  provided to third party manufacturers and include development services,
  production of molds for lenses and royalties from sales of lenses by third
  party manufacturers. Revenues from development services are recognized at the
  time services are provided. Revenues from production of molds are recognized
  upon delivery of the molds when all other criteria of SAB No. 104 are met.
  Revenues from minimum royalties are recognized when due. Other royalties are
  recognized quarterly, upon the receipt of sales reports from the third party
  manufacturer customers.
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                           | Amounts billed to
  customers for shipping and handling costs are classified as revenues in the
  consolidated statements of income with the associated costs included as a
  component of cost of revenues.                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | m.                                        | Research and development
  costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                           | Research and development
  costs are charged to the statement of income as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | n.                                        | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                           | Until 2005, no provision
  for income taxes was reflected in respect of the Company in the comparative
  figures in the financial statements, since the tax effects of the Companys
  income were passed through to the individual shareholders. On March 6, 2005,
  in connection with the IPO, the Company changed its legal structure from an
  Agricultural Cooperative Society (ACS) into an Israeli limited liability
  company.                                                                                                                                                                     
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                           | Shamir accounts for income
  taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This
  Statement prescribes the use of the liability method whereby deferred tax
  assets and liability account balances are determined based on differences
  between financial reporting and tax bases of assets and liabilities and are
  measured using the enacted tax rates and laws that will be in effect when the
  differences are expected to reverse. Shamir provides a valuation allowance,
  if necessary, to reduce deferred tax assets to their estimated realizable
  value.              

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.)
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                           | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | o.                                        | Advertising expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                           | Advertising costs are
  expensed as incurred. Advertising expenses for the years ended December 31,
  2005, 2006 and 2007, were $ 1,851, $ 2,964 and $ 2,566, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | p.                                        | Concentrations
  of credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                           | Financial instruments that
  potentially subject Shamir to concentrations of credit risk consist
  principally of cash and cash equivalents, marketable securities and trade
  receivables. The majority of Shamirs cash and cash equivalents are invested
  mainly in dollar and Euro instruments with major banks in Israel, Germany and
  the U.S. Marketable securities include investments in debentures of 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 income (expenses), net.                                                                                                                                                                                                                                                                                            

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.)
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | q.                                        | 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 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. The value of the deposited
  funds is based on the cash surrendered value of these policies and includes
  immaterial profits.                                                                                                                                                                                                                                                                                                                                          
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                           | Severance expense for the
  years ended December 31, 2005, 2006 and 2007, amounted to $ 463, $ 504 and
  $ 535, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | r.                                        | Net earnings per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                           | Basic net earnings per
  share are computed based on the weighted average number of shares outstanding
  during each year. Diluted net earnings per share are computed based on the
  weighted average number of shares outstanding during each year, plus dilutive
  potential shares considered outstanding during the year, in accordance with
  SFAS No. 128, Earnings per Share.                                                                                                                                                                                                                                                                                                                  
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                           | The total weighted average
  number of shares related to the outstanding options excluded from the
  calculations of diluted net earnings per share because these securities are
  anti-dilutive was 357,416, 1,331,660 and 1,392,682 for the years ended
  December 31, 2005, 2006 and 2007, respectively.                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | s.                                        | Accounting for stock-based
  compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                           | On January 1, 2006, Shamir adopted SFAS No. 123 (revised 2004),
  Share-Based Payment (SFAS No. 123(R)) which requires the measurement and
  recognition of compensation expense based on estimated fair values for all
  share-based payment awards made to employees and directors. SFAS No. 123(R)
  supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock
  Issued to Employees (APB No. 25), for periods beginning in fiscal year
  2006. In March 2005, the Securities and Exchange Commission issued Staff
  Accounting Bulletin No. 107 (SAB 107) relating to SFAS No. 123(R). Shamir has applied the provisions of SAB 107 in
  its adoption of SFAS No. 123(R).

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.)

Effective
January 1, 2006, Shamir adopted SFAS No. 123(R) using the modified prospective
transition method. Under that transition method, compensation cost recognized
in the years ended December 31, 2006 and December 31, 2007 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, and (b) compensation
cost for all share-based payments granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of
SFAS No. 123(R). Results for prior periods have not been restated, in
accordance with the modified prospective transition method.

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

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

|                                                                                                                                                          |  |                            |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | -
|                                                                                                                                                          |  | Year ended 
  December 31, |       
|                                                                                                                                                          |  |                            |       
|                                                                                                                                                          |  | 2005                       |       
|                                                                                                                                                          |  |                            |       
|                                                                                                                                                          |  |                            |        |  
|Net income as reported                                                                                                                                    |  | $                          | 8,105  |  
|Add: stock-based compensation expenses, net
  of minority share related to SII options, included in the reported net income                               |  |                            | 498    |  
|Deduct: Total stock-based compensation
  expenses determined under fair value based method for all awards, net of
  minority share related to SII options |  |                            | (1,418 | )
|                                                                                                                                                          |  |                            |        |  
|                                                                                                                                                          |  |                            |        |  
|Pro forma net
  income                                                                                                                                    |  | $                          | 7,185  |  
|                                                                                                                                                          |  |                            |        |  
|                                                                                                                                                          |  |                            |        |  
|Earnings per share                                                                                                                                        |  |                            |        |  
|Basic net earnings per share- as reported                                                                                                                 |  | $                          | 0.52   |  
|                                                                                                                                                          |  |                            |        |  
|Basic net earning per share - pro forma                                                                                                                   |  | $                          | 0.47   |  
|                                                                                                                                                          |  |                            |        |  
|Diluted net earning per share- as reported                                                                                                                |  | $                          | 0.51   |  
|                                                                                                                                                          |  |                            |        |  
|Diluted net earning per share- pro forma                                                                                                                  |  | $                          | 0.46   |  
|                                                                                                                                                          |  |                            |        |  

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.)

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

|                          |  |      |   | 
|------------------------- |  | ---- | - | 
|                          |  | 2005 |  
|                          |  |      |  
|                          |  |      |  
|Dividend
  yield          |  | 0    | % | 
|Expected
  volatility     |  | 32   | % | 
|Risk-free
  interest rate |  | 4    | % | 
|Expected
  life (years)   |  | 5    |   | 

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

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

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

The fair value
of Shamirs stock options granted to employees and directors for the years
ended December 31, 2006 and 2007, was estimated using the following
assumptions:

|                        |  |                                    |                 |                                    |  |                 | 
|----------------------- |  | ---------------------------------- | --------------- | ---------------------------------- |  | --------------- | 
|                        |  | Year ended 
  December 31, 
  2006 |                 | Year ended 
  December 31, 
  2007 | 
|                        |  |                                    |                 |                                    | 
|                        |  |                                    |                 |                                    | 
|Expected volatility     |  |                                    | 26.98% - 27.47% |                                    |  | 24.99% - 25.59% | 
|Risk-free interest rate |  |                                    | 4.92% - 5.1%    |                                    |  | 3.28% - 4.54%   | 
|Dividend yield          |  |                                    | 0%              |                                    |  | 0.81%-1.36%     | 
|Forfeiture rate         |  |                                    | 0%              |                                    |  | 4.48%           | 
|Expected life (years)   |  |                                    | 3.79 - 4.58     |                                    |  | 3.62 - 6.05     | 

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.)

A summary of
option activity under Shamirs stock option plans as of December 31, 2007, 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, 2007 |     
|                                                 |  |                      |           |                                       |   |                                                                     |  |                                                               |     
|                                                 | 
|Outstanding at January 1, 2007 *)                |  |                      | 1,846,673 |                                       | $ | 9.36                                                                |  |                                                               |      |  |   |       | 
|Granted                                          |  |                      | 268,000   |                                       | $ | 10.41                                                               |  |                                                               |      |  |   |       | 
|Exercised                                        |  |                      | (167,226  | )                                     |   | **)                                                                 |  |                                                               |      |  |   |       | 
|Forfeited                                        |  |                      | (289,581  | )                                     | $ | 12.36                                                               |  |                                                               |      |  |   |       | 
|                                                 |  |                      |           |                                       |   |                                                                     |  |                                                               |      |  |   |       | 
|Outstanding at December 31, 2007                 |  |                      | 1,657,866 |                                       | $ | 9.95                                                                |  |                                                               | 4.42 |  | $ | 1,458 | 
|                                                 |  |                      |           |                                       |   |                                                                     |  |                                                               |      |  |   |       | 
|                                                 |  |                      |           |                                       |   |                                                                     |  |                                                               |      |  |   |       | 
|Exercisable at December 31, 2007                 |  |                      | 862,967   |                                       | $ | 9.22                                                                |  |                                                               | 3.80 |  | $ | 1,309 | 
|                                                 |  |                      |           |                                       |   |                                                                     |  |                                                               |      |  |   |       | 
|                                                 |  |                      |           |                                       |   |                                                                     |  |                                                               |      |  |   |       | 
|Vested and expected to vest at December 31, 2007 |  |                      | 1,622,229 |                                       | $ | 9.93                                                                |  |                                                               | 4.40 |  | $ | 1,451 | 
|                                                 |  |                      |           |                                       |   |                                                                     |  |                                                               |      |  |   |       | 

*) Includes
options to non-employees (consultants), see note 16.**) Less than $0.01.

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 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 2007 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,
  2007.                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The
  weighted-average grant-date fair value of options granted during the years
  ended December 31, 2005, 2006 and 2007, was $ 4.99, $ 3.00 and $ 2.87,
  respectively. The total intrinsic value of options exercised during the years
  ended December 31, 2005, 2006 and 2007, was $ 0, $ 0 and $ 1,671, respectively.                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | As of
  December 31, 2007, there was $ 1,714 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 2.2 years. The total fair
  value of options vested during the year ended December 31, 2007, was $ 1,037.                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | t. | Fair value
  of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The following
  methods and assumptions were used by Shamir in estimating fair value and
  disclosures for financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The carrying
  amount reported in the balance sheet for cash and cash equivalents, trade
  receivables, short-term bank credit and trade payables approximate their fair
  values due to the short-term maturities of such instruments. The fair value
  of marketable securities is based on quoted market prices and does not differ
  significantly from the carrying amount. The fair value of long-term loans is
  estimated by discounting the future cash flows using the current interest
  rate for loans of similar terms and maturities. The carrying amount of the
  long-term loans approximates their fair value.

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.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | u. | Reclassification:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Certain
  amounts in prior years financial statements have been reclassified to
  conform to the current years presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | v. | Impact of
  recently issued accounting standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In September
  2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
  Fair Value Measurements (SFAS No. 157). This Standard defines fair
  value, establishes a framework for measuring fair value in generally accepted
  accounting principles and expands disclosures about fair value measurements.
  The provisions of SFAS No. 157 are effective for the Company
  beginning January 1, 2008. The FASB issued a FASB Staff Position (FSP)
  to defer the effective date of SFAS No. 157 for one year for all nonfinancial
  assets and nonfinancial liabilities, except for those items that are
  recognized or disclosed at fair value in the financial statements on a
  recurring basis. Shamir does not expect the adoption will have a material
  impact on its consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In December
  2007, the U.S. Securities and Exchange Commission (SEC) issued Staff
  Accounting Bulletin 110 (SAB 110) to amend the SECs views
  discussed in Staff Accounting Bulletin 107 (SAB 107) regarding
  the use of the simplified method in developing an estimate of expected life
  of share options in accordance with SFAS No. 123(R). SAB 110 is
  effective for the company beginning in the first quarter of fiscal year 2008.
  The adoption did not have a material impact on Shamirs consolidated
  financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In December
  2007, the FASB issued SFAS 141(R), Business Combinations (SFAS No. 141(R)).
  This Statement replaces SFAS 141, Business Combinations (SFAS No. 141), and
  requires an acquirer to recognize the assets acquired, the liabilities
  assumed, including those arising from contractual contingencies, any
  contingent consideration, and any non-controlling interest in the acquiree at
  the acquisition date, measured at their fair values as of that date, with
  limited exceptions specified in the statement. SFAS 141(R) also requires the
  acquirer in a business combination achieved in stages (sometimes referred to
  as a step acquisition) to recognize the identifiable assets and liabilities,
  as well as the non-controlling interest in the acquiree, at the full amounts
  of their fair values (or other amounts determined in accordance with SFAS
  141(R)). In addition, SFAS 141(R)s requirement to measure the non-controlling
  interest in the acquiree at fair value will result in recognizing the
  goodwill attributable to the non-controlling interest in addition to that attributable
  to the acquirer. SFAS 141(R) amends SFAS No. 109, Accounting for Income Taxes
  (SFAS No. 109), to require the acquirer to recognize changes in the amount
  of its deferred tax benefits that are recognizable because of a business
  combination either in income from continuing operations in the period of the
  combination or directly in contributed capital, depending on the
  circumstances. It also amends SFAS 142, Goodwill and Other Intangible Assets
  (SFAS No. 142), to, among other things; provide guidance on the impairment
  testing of acquired research and development intangible assets and assets
  that the acquirer intends not to use. SFAS 141(R) applies prospectively to
  business combinations for which the acquisition date is on or after the
  beginning of the first annual reporting period beginning on or after December
  15, 2008. Shamir is currently assessing the potential impact that the
  adoption of SFAS 141(R) could have on its consolidated financial statements.

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.)

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. Shamir is currently assessing the potential impact that the
adoption of SFAS 160 could have on its consolidated financial statements.

|         |                                                                                   
|-------- | ----------------------------------------------------------------------------------
|NOTE 3:- | MARKETABLE SECURITIES                                                             
|         |                                                                                   
|         | The
  following is a summary of the Shamirs investments in marketable securities:

|                                    |  |                   |        |                                    |   |                       |   |   |        | 
|----------------------------------- |  | ----------------- | ------ | ---------------------------------- | - | --------------------- | - | - | ------ | 
|                                    |  | December 31, 2006 |       
|                                    |  |                   |       
|                                    |  | Amortized 
  cost |        | Gross 
  unrealized 
  gain (loss) |   | Fair
  market
  value |  
|                                    |  |                   |        |                                    |   |                       |  
|                                   
|Available-for-sale:                 |  |                   |        |                                    |   |                       |   |   |        | 
|                                    |  |                   |        |                                    |   |                       |   |   |        | 
|Corporate debentures                |  | $                 | 1,005  |                                    | $ | (3                    | ) | $ | 1,002  | 
|U.S. government agencies securities |  |                   | 11,938 |                                    |   | (30                   | ) |   | 11,908 | 
|Other securities                    |  |                   | 3,760  |                                    |   | 12                    |   |   | 3,772  | 
|                                    |  |                   |        |                                    |   |                       |   |   |        | 
|                                    |  |                   |        |                                    |   |                       |   |   |        | 
|Total                               |  | $                 | 16,703 |                                    | $ | (21                   | ) |   | 16,682 | 
|                                    |  |                   |        |                                    |   |                       |   |   |        | 
|Accrued
  interest                  |  |                   |        |                                    |   |                       |   |   | 229    | 
|                                    |  |                   |        |                                    |   |                       |   |   |        | 
|                                    |  |                   |        |                                    |   |                       |   | $ | 16,911 | 
|                                    |  |                   |        |                                    |   |                       |   |   |        | 

|                                    |  |                   |        |                                  |   |                       |   |   |        | 
|----------------------------------- |  | ----------------- | ------ | -------------------------------- | - | --------------------- | - | - | ------ | 
|                                    |  | December 31, 2007 |       
|                                    |  |                   |       
|                                    |  | Amortized 
  cost |        | Net 
  Unrealized 
  gain (loss) |   | Fair
  market
  value |  
|                                    |  |                   |        |                                  |   |                       |  
|                                   
|Available-for-sale:                 |  |                   |        |                                  |   |                       |   |   |        | 
|                                    |  |                   |        |                                  |   |                       |   |   |        | 
|Corporate debentures                |  | $                 | 2,002  |                                  | $ | (6                    | ) | $ | 1,996  | 
|U.S. government agencies securities |  |                   | 12,137 |                                  |   | 48                    |   |   | 12,185 | 
|                                    |  |                   |        |                                  |   |                       |   |   |        | 
|                                    |  |                   |        |                                  |   |                       |   |   |        | 
|Total                               |  | $                 | 14,139 |                                  | $ | 42                    |   |   | 14,181 | 
|                                    |  |                   |        |                                  |   |                       |   |   |        | 
|Accrued
  interest                  |  |                   |        |                                  |   |                       |   |   | 194    | 
|                                    |  |                   |        |                                  |   |                       |   |   |        | 
|                                    |  |                   |        |                                  |   |                       |   | $ | 14,375 | 
|                                    |  |                   |        |                                  |   |                       |   |   |        | 

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 3:- | MARKETABLE SECURITIES (Cont.)

As of December
31, 2007, the gross unrealized gains amounted to $ 51 and the gross
unrealized losses amounted to $ 9.

The amortized
cost and fair value of marketable securities as of December 31, 2007, by
contractual maturity, are shown below:

|                                            |  |                   |        |                      |   |        | 
|------------------------------------------- |  | ----------------- | ------ | -------------------- | - | ------ | 
|                                            |  | December 31, 2007 |       
|                                            |  |                   |       
|                                            |  | Amortized 
  cost |        | Fair 
  market value |  
|                                            |  |                   |        |                      |  
|                                           
|Matures in
  one year                       |  | $                 | 2,176  |                      | $ | 2,175  | 
|Matures
  after one year through five years |  |                   | 11,963 |                      |   | 12,006 | 
|                                            |  |                   |        |                      |   |        | 
|                                            |  |                   |        |                      |   |        | 
|Total                                       |  | $                 | 14,139 |                      | $ | 14,181 | 
|                                            |  |                   |        |                      |   |        | 

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

|                                  |  |              |       |      |   |       | 
|--------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                                  |  | December 31, |      
|                                  |  |              |      
|                                  |  | 2006         |       | 2007 |  
|                                  |  |              |       |      |  
|                                 
|Prepaid
  expenses                |  | $            | 1,283 |      | $ | 1,145 | 
|Government
  authorities          |  |              | 1,200 |      |   | 3,155 | 
|Deferred tax
  assets             |  |              | 2,418 |      |   | 1,794 | 
|Related
  parties                 |  |              | 93    |      |   | 90    | 
|Government
  grants and subsidies |  |              | -     |      |   | 270   | 
|Employees                         |  |              | 123   |      |   | 160   | 
|Derivatives                       |  |              | 21    |      |   | 129   | 
|Other                             |  |              | 529   |      |   | 780   | 
|                                  |  |              |       |      |   |       | 
|                                  |  |              |       |      |   |       | 
|                                  |  | $            | 5,667 |      | $ | 7,523 | 
|                                  |  |              |       |      |   |       | 

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

|                 |  |              |        |      |   |        | 
|---------------- |  | ------------ | ------ | ---- | - | ------ | 
|                 |  | December 31, |       
|                 |  |              |       
|                 |  | 2006         |        | 2007 |  
|                 |  |              |        |      |  
|                
|Raw
  materials  |  | $            | 3,161  |      | $ | 3,372  | 
|Work-in-progress |  |              | 332    |      |   | 985    | 
|Finished
  goods |  |              | 24,405 |      |   | 23,615 | 
|                 |  |              |        |      |   |        | 
|                 |  |              |        |      |   |        | 
|                 |  | $            | 27,898 |      | $ | 27,972 | 
|                 |  |              |        |      |   |        | 

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 6:- | INVESTMENTS IN AFFILIATES AND OTHERS

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

|                                              |  |      |     |                                                         |              |      |      |      |      | 
|--------------------------------------------- |  | ---- | --- | ------------------------------------------------------- | ------------ | ---- | ---- | ---- | ---- | 
|                                              |  |      |     |                                                         | December 31, |     
|                                              |  |      |     |                                                         |              |     
|                                              |  |      |     |                                                         | 2006         |      | 2007 |     
|                                              |  |      |     |                                                         |              |      |      |     
|                                              |  | Note |     | Percentage of ownership of 
  outstanding share capital |             
|                                              |  |      |     |                                                         |             
|                                             
|Shamir
  Israel                               |  |      |     |                                                         | 50           | %    |      |      | *)   | 
|Centro
  Integral Optico S.A. de C.V. (CIO) |  | 6c   | (1) |                                                         | 26           | %    |      | 26   | %    | 
|Shalens S.A.
  de C.V. (Shalens)            |  | 6d   |     |                                                         | 26           | %    |      | 26   | %    | 
|Siam Optical
  Technology Company Ltd.**)     |  | 6d   |     |                                                         | -            |      |      | 25.8 | %    | 
|e-Vision LLC                                  |  |      |     |                                                         |              | ***) |      |      | ***) | 

| |      |                                                                                                                                                                                                                                                      
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *)   | On August
  15, 2007, Shamir acquired an additional 50% of the ownership interest and the
  voting power in Shamir Israel, an Israeli based affiliate, increasing its
  ownership interest to 100%.                                                  
| | **)  | On January
  4, 2007, Shamir acquired 25.8% of the ownership interests and voting power in
  Siam Optical Technology Company Ltd.(SOT), an optical laboratory in
  Thailand, which holds 70% of its local subsidiary, K.T. Optic Company
  Limited.
| | ***) | Less than
  20% ownership. The investment is stated on the cost basis.                                                                                                                                                                               

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

|                       |  |              |       |      |   |       | 
|---------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                       |  | December 31, |      
|                       |  |              |      
|                       |  | 2006         |       | 2007 |  
|                       |  |              |       |      |  
|                      
|Shamir
  Israel        |  | $            | 185   |      | $ | -     | 
|CIO                    |  |              | 2,554 |      |   | 2,785 | 
|Shalens S.A.
  de C.V. |  |              | 98    |      |   | 136   | 
|SOT                    |  |              | -     |      |   | 840   | 
|e-Vision LLC           |  |              | 676   |      |   | 676   | 
|                       |  |              |       |      |   |       | 
|                       |  |              |       |      |   |       | 
|                       |  | $            | 3,513 |      | $ | 4,437 | 
|                       |  |              |       |      |   |       | 

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

|                           |  |              |       | 
|-------------------------- |  | ------------ | ----- | 
|                           |  | December 31, |      
|                           |  | 2007         |      
|                           |  |              |      
|                          
|Equity, net
  (1)          |  | $            | 2,187 | 
|                           |  |              |       | 
|Long-term
  loans (2)      |  |              | 598   | 
|                           |  |              |       | 
|                           |  |              |       | 
|Total
  investments in CIO |  | $            | 2,785 | 
|                           |  |              |       | 

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 (cont.)

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

|                                                           |  |                     |       |  
|---------------------------------------------------------- |  | ------------------- | ----- | -
|                                                           |  | December 31,
  2007 |      
|                                                           |  |                     |      
|                                                          
|Net equity as of purchase date                             |  | $                   | 428   |  
|Unamortized goodwill                                       |  |                     | 1,088 |  
|Customers relationships, net of accumulated
  amortization |  |                     | 648   |  
|Accumulated net losses                                     |  |                     | (77   | )
|Option value *)                                            |  |                     | 100   |  
|                                                           |  |                     |       |  
|                                                           |  |                     |       |  
|Total investments in CIO.                                  |  | $                   | 2,187 |  
|                                                           |  |                     |       |  

| |    |                                                                                                                                                                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *) | On February
  19, 2008, Shamir has exercised its option to increase its holdings in CIO and
  Shalens by an additional 25% to a total of 51%. The option was exercised in
  full for an additional $2,860 in cash that was paid directly to CIOs
  shareholders.
  The option in Shalens was exercised per value of the shares.

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

| |    |                                                          
| | -- | ---------------------------------------------------------
| | d. | Additional
  information - investment in SOT and Shalens:

|                                            |  |     |     |         |   |     | 
|------------------------------------------- |  | --- | --- | ------- | - | --- | 
|                                            |  | SOT |     | Shalens |  
|                                            |  |     |     |         |  
|                                           
|Investment
  in shares and option *)        |  | $   | 270 |         | $ | 32  | 
|                                            |  |     |     |         |   |     | 
|Long-term
  loans **)                       |  |     | 570 |         |   | 104 | 
|                                            |  |     |     |         |   |     | 
|                                            |  |     |     |         |   |     | 
|Total
  investments as of December 31, 2007 |  | $   | 840 |         | $ | 136 | 
|                                            |  |     |     |         |   |     | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *)  | Shamir has
  an option to increase holdings in SOTs Ordinary Shares by additional 23.2%
  to a total of 49% and to 51% of voting rights. The option expired at January
  8, 2008. At the expiration date the option was renewed and amended until June
  30, 2008. The option price, should it be exercised in full, is an additional
  $ 762 in cash (including a shareholders loan) that would be paid to SOT and
  certain shareholders. The parties are currently negotiating a second
  amendment to the terms of the above mentioned option of Shamir.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | **) | The loans to
  SOT bear no interest rate and the loans to Shalens S.A. bear an interest rate
  of 4% per annum.                                                                                                                                                                                                                                                                                                                                                                                                                                               

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 7:- | PROPERTY, PLANT AND EQUIPMENT, NET

|                                           |  |              |        |      |   |        | 
|------------------------------------------ |  | ------------ | ------ | ---- | - | ------ | 
|                                           |  | December 31, |       
|                                           |  |              |       
|                                           |  | 2006         |        | 2007 |  
|                                           |  |              |        |      |  
|                                           | 
|Cost:                                      |  |              |        |      |   |        | 
|Machinery and manufacturing equipment      |  | $            | 29,977 |      | $ | 38,599 | 
|Office equipment and furniture             |  |              | 5,847  |      |   | 7,085  | 
|Motor vehicles                             |  |              | 987    |      |   | 291    | 
|Land, buildings and leasehold
improvements |  |              | 10,662 |      |   | 17,222 | 
|                                           |  |              |        |      |   |        | 
|                                           |  |              |        |      |   |        | 
|                                           |  |              | 47,473 |      |   | 63,197 | 
|Accumulated
  depreciation                 |  |              | 19,105 |      |   | 24,027 | 
|                                           |  |              |        |      |   |        | 
|                                           |  |              |        |      |   |        | 
|Depreciated
  cost                         |  | $            | 28,368 |      | $ | 39,170 | 
|                                           |  |              |        |      |   |        | 

Depreciation expense totaled $ 4,228, $ 5,282 and
$ 5,094 for the years ended December 31, 2005, 2006 and 2007,
respectively.

At December 31, 2006 and 2007, property and equipment under
capital leases consisted of assets with a depreciated cost of $ 7,362 and
$ 8,089, respectively.

Depreciation of property and equipment under capital leases totaled
$ 816, $ 1,535 and $ 1,599 for the years ended December 31, 2005,
2006 and 2007, respectively.

As for pledges, see Note 14c.

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

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

|                                   |  |              |       |      |   |       | 
|---------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                                   |  | December 31, |      
|                                   |  |              |      
|                                   |  | 2006         |       | 2007 |  
|                                   |  |              |       |      |  
|                                   | 
|Deferred tax
  assets              |  | $            | 2,430 |      | $ | 1,997 | 
|Other
  intangible assets, net (b) |  |              | 2,932 |      |   | 3,415 | 
|                                   |  |              |       |      |   |       | 
|                                   |  |              |       |      |   |       | 
|Total other
  assets               |  | $            | 5,362 |      | $ | 5,412 | 
|                                   |  |              |       |      |   |       | 

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 (cont.)

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

|                                |  |              |       |      |   |       | 
|------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                                |  | December 31, |      
|                                |  |              |      
|                                |  | 2006         |       | 2007 |  
|                                |  |              |       |      |  
|                               
|Original
  amounts:             |  |              |       |      |   |       | 
|Technology                      |  | $            | 407   |      | $ | 422   | 
|Customer relationship           |  |              | 2,209 |      |   | 2,438 | 
|Non-competition                 |  |              | 317   |      |   | 353   | 
|Distribution channels           |  |              | 1,006 |      |   | 1,200 | 
|Patents                         |  |              | -     |      |   | 895   | 
|Trade name                      |  |              | 688   |      |   | 936   | 
|                                |  |              |       |      |   |       | 
|                                |  |              |       |      |   |       | 
|                                |  |              | 4,627 |      |   | 6,244 | 
|                                |  |              |       |      |   |       | 
|Accumulated
  amortization:     |  |              |       |      |   |       | 
|Technology                      |  |              | 213   |      |   | 285   | 
|Customer relationship           |  |              | 901   |      |   | 1,403 | 
|Non-competition                 |  |              | 158   |      |   | 293   | 
|Distribution channels           |  |              | 252   |      |   | 472   | 
|Patents                         |  |              | -     |      |   | 45    | 
|Trade name                      |  |              | 171   |      |   | 331   | 
|                                |  |              |       |      |   |       | 
|                                |  |              |       |      |   |       | 
|                                |  |              | 1,695 |      |   | 2,829 | 
|                                |  |              |       |      |   |       | 
|                                |  |              |       |      |   |       | 
|Total other
  intangible assets |  | $            | 2,932 |      | $ | 3,415 | 
|                                |  |              |       |      |   |       | 

| |     |                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------
| | (2) | Amortization
  expense amounted to $ 501, $ 968 and $ 1,058 for the years ended
  December 31, 2005, 2006 and 2007, respectively.
| |     |                                                                                                                                  
| | (3) | Estimated
  amortization expense for the years ended:                                                                            

|                      |  |   |       | 
|--------------------- |  | - | ----- | 
|2008                  |  | $ | 1,047 | 
|2009                  |  |   | 709   | 
|2010                  |  |   | 625   | 
|2011                  |  |   | 292   | 
|2012 and
  thereafter |  |   | 742   | 
|                      |  |   |       | 
|                      |  |   |       | 
|                      |  | $ | 3,415 | 
|                      |  |   |       | 

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, 2006 and
  2007, are as follows:

|                                                          |  |   |       |  
|--------------------------------------------------------- |  | - | ----- | -
|Balance as of January 1, 2006                             |  | $ | 6,745 |  
|Goodwill
  acquired during the year                       |  |   | 104   |  
|Additional
  consideration in respect of 2006 earnings *) |  |   | 449   |  
|Reduction of
  goodwill due to loan write off **)         |  |   | (355  | )
|Foreign
  currency translation adjustments                |  |   | 235   |  
|                                                          |  |   |       |  
|                                                          |  |   |       |  
|Balance as
  of December 31, 2006                         |  |   | 7,178 |  
|Goodwill
  acquired during the year                       |  |   | 66    |  
|Additional
  consideration in respect of 2007 earnings *) |  |   | 220   |  
|Foreign
  currency translation adjustments                |  |   | 78    |  
|                                                          |  |   |       |  
|                                                          |  |   |       |  
|Balance as
  of December 31, 2007                         |  | $ | 7,542 |  
|                                                          |  |   |       |  

| |     |             
| | --- | ------------
| | *)  | See Note 1d.
| | **) | See Note 1b.
| |     |             

|          |                                                                            
|--------- | ---------------------------------------------------------------------------
|NOTE 10:- | SHORT-TERM BANK CREDIT AND LOANS                                           
|          |                                                                            
|          | Short-term
  bank credit and loans are classified by currencies as follows:

|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|---------------------------------------- |  | -------------------------------- | --- | ------------ |  | ---- |  | ---- | ------ |  | - | ------ | 
|                                         |  | Weighted average
  interest rate |     |              |  |      |  |      |       
|                                         |  |                                  |     |              |  |      |  |      |       
|                                         |  | December 31,                     |     | December 31, | 
|                                         |  |                                  |     |              | 
|                                         |  | 2006                             |     | 2007         |  | 2006 |  | 2007 |       
|                                         |  |                                  |     |              |  |      |  |      |       
|                                         |  | %                                |     |              |  |      |  |      |       
|                                         |  |                                  |     |              |  |      |  |      |       
|                                        
|Short-term
  bank loans - Euro           |  |                                  | 5.0 |              |  | 6.5  |  | $    | 12,258 |  | $ | 14,303 | 
|Short-term
  bank credit *)              |  |                                  | 5.5 |              |  | 5.7  |  |      | 1,396  |  |   | 1,647  | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|Total
  short-term bank credit and loans |  |                                  | 5.1 |              |  | 6.4  |  | $    | 13,654 |  | $ | 15,950 | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 

| |                                                                                                                           |                              
| | ------------------------------------------------------------------------------------------------------------------------- | -----------------------------
| | *)                                                                                                                        | Mostly denominated
  in Euro.
| |                                                                                                                           |                              
| | As of
  December 31, 2007, Shamir had authorized unused credit lines from banks in
  the amount of approximately $ 4,884.

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 11:- | ACCRUED EXPENSES AND OTHER LIABILITIES

|                                 |  |              |        |      |   |        | 
|-------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
|                                 |  | December 31, |       
|                                 |  |              |       
|                                 |  | 2006         |        | 2007 |  
|                                 |  |              |        |      |  
|                                
|Employees
  and payroll accruals |  | $            | 3,511  |      | $ | 4,471  | 
|Accrued
  expenses               |  |              | 3,997  |      |   | 4,743  | 
|Advances
  from customers        |  |              | 29     |      |   | 76     | 
|Government
  authorities         |  |              | 2,290  |      |   | 1,934  | 
|Related
  party                  |  |              | 390    |      |   | 230    | 
|Former
  shareholders in SII     |  |              | 449    |      |   | 355    | 
|Others                           |  |              | 878    |      |   | 926    | 
|                                 |  |              |        |      |   |        | 
|                                 |  |              |        |      |   |        | 
|                                 |  | $            | 11,544 |      | $ | 12,735 | 
|                                 |  |              |        |      |   |        | 

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

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

|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|---------------------------------------- |  | -------------------------------- | --- | ------------ |  | ---- |  | ---- | ------ |  | - | ------ | 
|                                         |  | Weighted average
  interest rate |     |              |  |      |  |      |       
|                                         |  |                                  |     |              |  |      |  |      |       
|                                         |  | December 31,                     |     | December 31, | 
|                                         |  |                                  |     |              | 
|                                         |  | 2006                             |     | 2007         |  | 2006 |  | 2007 |       
|                                         |  |                                  |     |              |  |      |  |      |       
|                                         |  | %                                |     |              |  |      |  |      |       
|                                         |  |                                  |     |              |  |      |  |      |       
|                                        
|Banks:                                   |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|Dollar                                   |  |                                  | 5.4 |              |  | -    |  | $    | 28     |  | $ | -      | 
|Euro                                     |  |                                  | 4.7 |              |  | 5.0  |  |      | 13,335 |  |   | 15,312 | 
|NIS                                      |  |                                  | 4.7 |              |  | 4.4  |  |      | 1,358  |  |   | 734    | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|                                         |  |                                  |     |              |  |      |  |      | 14,721 |  |   | 16,046 | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|Minority
  shareholders in subsidiaries: |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|Dollar *)                                |  |                                  | 5.2 |              |  | 5.2  |  |      | 84     |  |   | 50     | 
|Euro *)                                  |  |                                  | 4.9 |              |  | 4.9  |  |      | 5,023  |  |   | 5,909  | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|                                         |  |                                  |     |              |  |      |  |      | 5,107  |  |   | 5,959  | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|Others:                                  |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|Dollar                                   |  |                                  | 5.0 |              |  | 2.7  |  |      | 145    |  |   | 263    | 
|Euro                                     |  |                                  | -   |              |  | -    |  |      | 759    |  |   | 490    | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|                                         |  |                                  |     |              |  |      |  |      | 904    |  |   | 753    | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|Total
  long-term loans                  |  |                                  |     |              |  |      |  |      | 20,732 |  |   | 22,758 | 
|Less -
  current maturities              |  |                                  |     |              |  |      |  |      | 2,737  |  |   | 5,267  | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 
|                                         |  |                                  |     |              |  |      |  | $    | 17,995 |  | $ | 17,491 | 
|                                         |  |                                  |     |              |  |      |  |      |        |  |   |        | 

| |    |                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *) | 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, 2007.

F-32

---

---

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

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

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

|                          |  |   |        | 
|------------------------- |  | - | ------ | 
|2008 (current maturities) |  |   | 5,267  | 
|2009                      |  |   | 5,528  | 
|2010                      |  |   | 2,002  | 
|2011 and
  thereafter     |  |   | 4,002  | 
|                          |  |   |        | 
|                          |  |   |        | 
|                          |  | $ | 16,799 | 
|                          |  |   |        | 

| |    |                                                                                                                               
| | -- | ------------------------------------------------------------------------------------------------------------------------------
| | c. | Financial covenants                                                                                                           
| |    |                                                                                                                               
| |    | As security
  for various bank liabilities, Shamirs subsidiaries undertook to comply with
  certain minimal financial ratios.

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

Capital leases mature as follows:

|                            |  |   |       | 
|--------------------------- |  | - | ----- | 
|2008
  (current maturities) |  | $ | 2,422 | 
|2009                        |  |   | 1,937 | 
|2010                        |  |   | 956   | 
|2011 and
  thereafter       |  |   | 1,410 | 
|                            |  |   |       | 
|                            |  |   |       | 
|Total                       |  | $ | 6,725 | 
|                            |  |   |       | 

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.

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.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 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, 2007 are as follows:                                                                                                                                                                                                                                          

|           |  |   |        | 
|---------- |  | - | ------ | 
|2008       |  | $ | 1,811  | 
|2009       |  |   | 1,714  | 
|2010       |  |   | 1,693  | 
|2011       |  |   | 1,673  | 
|2012       |  |   | 1,678  | 
|Thereafter |  |   | 10,364 | 
|           |  |   |        | 
|           |  |   |        | 
|           |  | $ | 18,933 | 
|           |  |   |        | 

| |    |                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------
| |    | Lease
  expenses for the years ended December 31, 2005, 2006 and 2007 were
  approximately $572, $1,082 and $1,294, respectively.
| |    |                                                                                                                                  
| | c. | Pledges and
  guarantees:                                                                                                        

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | In order to
  secure Government grants received by the Company and one of its Israeli
  subsidiaries, Eyal Optical Industries (1998) Ltd. (Eyal), under the
  Approved Enterprise programs pursuant to the Law for the Encouragement of
  Capital Investments, 1959, the Company and Eyal granted pledges in favor of
  the State of Israel on all of its assets, by floating charges in an unlimited
  amount (see also Note 15d).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 2. | AS a
  security for the fulfillment of its liabilities, Eyal granted unlimited
  charges in favor of the banks, on all of its assets. Additionally, other
  subsidiaries of the Company pledged their land and buildings in an aggregate
  amount of approximately $5,223 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 $120.                                                                                                                                                                                                                                                                    

F-34

---

---

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

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Up until
  December 31, 2004, the Company was not assessed for tax purposes and its
  business results were passed through to its shareholders. As a result, 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 (see also Note 1a).                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | b. | Measurement
  of taxable income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Results for
  tax purposes of Israeli entities are measured and reflected in real terms in
  accordance with the change in the Israeli Consumer Price Index (CPI) or
  changes in the exchange rate of the NIS against the dollar for a foreign
  investors company. The Company has elected to measure its results for tax
  purposes on the basis of the changes in the exchange rate of NIS against the
  dollar. As of the year 2007, the Companys subsidiaries Eyal and  Shamir Special Optical Products Ltd.
  (SSOP) also elected to measure their results for tax purposes on the basis
  of the changes in the exchange rate of NIS against the U.S. dollar.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | c. | Tax benefits
  under Israels Law for the Encouragement of Industry (Taxation), 1969:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The Company,
  Eyal and SSOP are industrial companies, as defined in the abovementioned
  law and, as such, are entitled to certain tax benefits, including the right
  to deduct public issuance expenses and 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.                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | d. | Tax benefits
  under the Israel Law for the Encouragement of Capital Investments, 1959 (the
  Law):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The Law
  empowers the Israeli Investment Center to grant Approved Enterprise status to
  capital investments in production facilities that meet certain relevant
  criteria (Approved Enterprise). In general, such capital investments will
  receive Approved Enterprise status if the enterprise is expected to
  contribute to the development of the productive capacity of the economy, absorption
  of immigrants, creation of employment opportunities, or improvement in the
  balance of payments.                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The tax
  benefits derived from any such Approved Enterprise relate only to taxable
  income attributable to the specific program of investment to which the status
  was granted. To the extent that Shamir or any of its subsidiaries has been
  granted Approved Enterprise status and operates under more than one approval,
  or that 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.                                                                                                                                                           

F-35

---

---

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

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
  December 31, 2007, the Company has three existing programs that have been
  granted status as Approved Enterprises under the Law. According to the Law,
  Shamir is entitled to investment grants (up to 30% of investment cost) and
  also to a tax benefit, which grants Shamir 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).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Shamirs
  income from sources other than Approved Enterprises during the benefits
  period will be taxable at the regular corporate tax rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 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 benefits
  are contingent upon compliance with the terms of the letter of approval and
  the Law. As of December 31, 2007, management believes that both Shamir and
  Eyal meet all conditions of the approvals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The period
  of tax benefits detailed above is subject to limits of the earlier of 12
  years from the commencement of production or 14 years from receiving the
  approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Law also
  entitles Shamir and Eyal to claim accelerated depreciation on equipment used
  by an Approved Enterprise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 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.                                                               

F-36

---

---

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

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 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, 2007, SSOP has not begun to enjoy the tax benefits 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, 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, 2007, retained earnings included approximately $9,470
  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | e. | Net
  operating losses carryforward:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | As of
  December 31, 2007, 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 $ 19,170, out of which an amount of
  $14,953 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The regular
  corporate tax rate in Israel in 2007 was 29%. The corporate tax rate is to be
  gradually reduced as follows: in 2008 - 27%, in 2009 - 26% and in 2010 and
  onward - 25%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-37

---

---

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

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

| |   |                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, |       
|                                                       |  |              |       
|                                                       |  | 2006         |        | 2007 |  
|                                                       |  |              |        |      |  
|                                                       |  |              |        |      |   |        |  
|Deferred tax assets:                                   |  |              |        |      |   |        |  
|Unrealized gains and others                            |  | $            | 1,351  |      | $ | 1,183  |  
|Operating losses carry forward                         |  |              | 4,309  |      |   | 5,343  |  
|                                                       |  |              |        |      |   |        |  
|                                                       |  |              |        |      |   |        |  
|Total deferred tax assets before valuation
  allowance |  |              | 5,660  |      |   | 6,526  |  
|Valuation allowance **)                                |  |              | (812   | )    |   | (2,735 | )
|                                                       |  |              |        |      |   |        |  
|                                                       |  |              |        |      |   |        |  
|Total deferred tax assets *)                           |  |              | 4,848  |      |   | 3,791  |  
|                                                       |  |              |        |      |   |        |  
|                                                       |  |              |        |      |   |        |  
|Deferred tax liabilities:                              |  |              |        |      |   |        |  
|Property and equipment                                 |  |              | (664   | )    |   | (802   | )
|Other intangible assets                                |  |              | (623   | )    |   | (584   | )
|                                                       |  |              |        |      |   |        |  
|                                                       |  |              |        |      |   |        |  
|Total deferred tax liabilities ***)                    |  |              | (1,287 | )    |   | (1,386 | )
|                                                       |  |              |        |      |   |        |  
|                                                       |  |              |        |      |   |        |  
|Net deferred tax assets                                |  | $            | 3,561  |      | $ | 2,405  |  
|                                                       |  |              |        |      |   |        |  

| |                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                          
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *)                                                                                                                                                                                                                                            | Deferred tax
  assets of $ 2,418 and $ 1,794 have been included in other accounts receivable
  and prepaid expenses and $ 2,430 and $ 1,997 have been included in other
  assets, as of December 31, 2006 and 2007, respectively (see Note 4 and
  Note 8a).                             
| | **)                                                                                                                                                                                                                                           | Including
  valuation allowance in the amount of $ 367 that is attributed to operating
  losses at Shamir Or before the acquisition date. Any subsequent reduction of
  this valuation allowance and the recognition of the associated tax benefit
  will be applied to reduced goodwill.
| | ***)                                                                                                                                                                                                                                          | Deferred tax
  liabilities of $ 0 and $ 28 have been included in other accrued expenses and
  other liabilities, as of December 31, 2006 and 2007, respectively.                                                                                                                         
| |                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                          
| | The Company
  has provided valuation allowances in respect of certain deferred tax assets
  resulting from tax loss carryforwards and other reserves and allowances due
  to uncertainty concerning realization of these deferred tax assets.

F-38

---

---

|                                                           
|-----------------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD.  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (expect 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, |       
|                                                                                                                   |  |                         |       
|                                                                                                                   |  | 2005                    |        | 2006 |   | 2007  |   
|                                                                                                                   |  |                         |        |      |   |       |   
|                                                                                                                   |  |                         |        |      |   |       |    |   |        |   
|Income before taxes on income                                                                                      |  | $                       | 12,497 |      | $ | 6,927 |    | $ | 11,659 |   
|                                                                                                                   |  |                         |        |      |   |       |    |   |        |   
|                                                                                                                   |  |                         |        |      |   |       |    |   |        |   
|Statutory tax rate in Israel                                                                                       |  |                         | 34     | %    |   | 31    | %  |   | 29     | % 
|                                                                                                                   |  |                         |        |      |   |       |    |   |        |   
|                                                                                                                   |  |                         |        |      |   |       |    |   |        |   
|Increase (decrease) in tax expenses
  resulting from:                                                              |  |                         |        |      |   |       |    |   |        |   
|Approved Enterprise benefits                                                                                     |  |                         | (6.9   | )%   |   | (7.5  | )% |   | (9.1   | )%
|Tax expenses related to change of tax
  status                                                                     |  |                         | 3.3    | %    |   | -     |    |   | -      |   
|Net operating losses and temporary
  differences which are tax exempt or for which valuation allowance was created |  |                         | -      |      |   | 4.3   | %  |   | 10.1   | % 
|Subsidiaries with a different tax rate                                                                             |  |                         | 2.9    | %    |   | 1.2   | %  |   | 3.2    | % 
|Change in valuation allowance in respect of
  prior years                                                          |  |                         | -      |      |   | -     |    |   | 9.6    | % 
|Taxes in respect of prior years                                                                                    |  |                         | 1.2    | %    |   | -     |    |   | (2.4   | )%
|Others                                                                                                             |  |                         | 1.5    | %    |   | 2.2   | %  |   | 2.6    | % 
|                                                                                                                   |  |                         |        |      |   |       |    |   |        |   
|                                                                                                                   |  |                         |        |      |   |       |    |   |        |   
|Effective tax rate                                                                                                 |  |                         | 36.0   | %    |   | 31.2  | %  |   | 43.0   | % 
|                                                                                                                   |  |                         |        |      |   |       |    |   |        |   
|                                                                                                                   |  |                         |        |      |   |       |    |   |        |   
|Basic and diluted net earnings per share
  amounts of the benefit resulting from the Approved Enterprise status  |  | $                       | 0.05   |      | $ | 0.06  |    | $ | 0.06   |   
|                                                                                                                   |  |                         |        |      |   |       |    |   |        |   

| |    |                                                              
| | -- | -------------------------------------------------------------
| | i. | Income (loss) before taxes on income is comprised as follows:

|         |  |                         |        |      |   |        |   |   |        | 
|-------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | 
|         |  | Year ended December 31, |       
|         |  |                         |       
|         |  | 2005                    |        | 2006 |   | 2007   |  
|         |  |                         |        |      |   |        |  
|         |  |                         |        |      |   |        |   |   |        | 
|Domestic |  | $                       | 11,943 |      | $ | 11,101 |   | $ | 10,799 | 
|Foreign  |  |                         | 554    |      |   | (4,174 | ) |   | 860    | 
|         |  |                         |        |      |   |        |   |   |        | 
|         |  |                         |        |      |   |        |   |   |        | 
|         |  | $                       | 12,497 |      | $ | 6,927  |   | $ | 11,659 | 
|         |  |                         |        |      |   |        |   |   |        | 

F-39

---

---

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

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

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

|                                                          |  |                         |       |      |   |        |   |   |       |  
|--------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ------ | - | - | ----- | -
|                                                          |  | Year ended December 31, |      
|                                                          |  |                         |      
|                                                          |  | 2005                    |       | 2006 |   | 2007   |  
|                                                          |  |                         |       |      |   |        |  
|                                                          |  |                         |       |      |   |        |   |   |       |  
|Current taxes                                             |  | $                       | 4,274 |      | $ | 4,166  |   | $ | 3,550 |  
|Change in valuation allowance in respect of
  prior years |  |                         | -     |      |   | -      |   |   | 1,128 |  
|Taxes in respect of prior years                           |  |                         | 145   |      |   | -      |   |   | (287  | )
|Deferred tax expenses related to change of
  tax status   |  |                         | 414   |      |   | -      |   |   | -     |  
|Deferred tax benefit                                      |  |                         | (329  | )    |   | (1,987 | ) |   | 622   |  
|                                                          |  |                         |       |      |   |        |   |   |       |  
|                                                          |  |                         |       |      |   |        |   |   |       |  
|                                                          |  | $                       | 4,504 |      | $ | 2,179  |   | $ | 5,013 |  
|                                                          |  |                         |       |      |   |        |   |   |       |  
|                                                          |  |                         |       |      |   |        |   |   |       |  
|Domestic                                                  |  | $                       | 3,861 |      | $ | 3,062  |   | $ | 2,266 |  
|Foreign                                                   |  |                         | 643   |      |   | (883   | ) |   | 2,747 |  
|                                                          |  |                         |       |      |   |        |   |   |       |  
|                                                          |  |                         |       |      |   |        |   |   |       |  
|                                                          |  | $                       | 4,504 |      | $ | 2,179  |   | $ | 5,013 |  
|                                                          |  |                         |       |      |   |        |   |   |       |  

| |    |                           
| | -- | --------------------------
| | 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, 2007                  |  | $ | 489 |  
|Increases in
  tax positions for prior years  |  |   | 64  |  
|Decreases in
  tax positions for prior years  |  |   | (29 | )
|Increases in
  tax positions for current year |  |   | 321 |  
|                                              |  |   |     |  
|                                              |  |   |     |  
|Balance at
  December 31, 2007 *)             |  | $ | 845 |  
|                                              |  |   |     |  

| |    |                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                  
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | *)                                                                                                                                                                                                                                                                                    | Out of the
  above unrecognized tax benefits an amount of $845 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, 2007.
| |    |                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                  
| | l. | Tax
  jurisdictions examination years:                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                  
| |    | Shamir files
  income tax returns in multiple tax jurisdictions. The major tax jurisdictions
  are in the U.S.A., Germany and Israel. The tax years that remain subject to
  examination by the Israeli, German and the U.S.A. tax authorities are 2004,
  2003 and 2004 respectively

F-40

---

---

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

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | General:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | All share
  and per share data included in these financial statements for all periods
  presented have been retroactively adjusted to reflect the reorganization of
  the Companys equity approved on March 6, 2005, according to which each share
  of the Company was converted into 120.48 Ordinary shares of the reorganized
  corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | b. | Share
  rights:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Ordinary
  shares of the Company confer upon their holders the right to receive notice
  to participate and vote in the general meetings of the Company and the right
  to receive dividends when declared.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | c. | Issuance of
  shares:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | On March 16,
  2005, the Company issued 3,400,000 shares of NIS 0.01 par value in a net
  consideration of approximately $ 42,275 (excluding the tax benefit of $ 1,453),
  as part of its IPO on the NASDAQ.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | On March 16,
  2005, upon the IPO, the Put option that was granted as part of Eyal
  acquisition expired, and the Company reclassified 502,400 putable shares from
  temporary equity into shareholders equity. In addition, the Company
  classified the balance of its undistributed earnings as of March 16, 2005
  (the date of IPO) in the amount of $ 5,512 into additional paid-in capital in
  accordance with SAB Topic 4.B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | d. | Share option
  plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In 2003 and
  on February 1, 2006, Shamir adopted employee share option plans (the 2003
  Option Plan and the 2005 General Share and Incentive Plan, respectively).
  Under the 2003 Option Plan, employees and officers of Shamir may be granted
  options to acquire shares. The number of options to acquire Ordinary shares
  and the related exercise price are determined by the Board of Directors of
  Shamir and its compensation committee. Grants of options to directors require
  the approval of Shamirs shareholders according to the Israeli Companies Law.
  The 2005 General Share and Incentive Plan was approved and adopted by
  Shamirs Board of Directors on February 1, 2006. The 2005 General Share and
  Incentive Plan provides that 25% of the shares shall vest one year after the
  date of grant, and the remaining 75% shall vest on a monthly basis, with 1/36
  of the remaining shares vesting 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.

F-41

---

---

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

|          |                             
|--------- | ----------------------------
|NOTE 16:- | SHAREHOLDERS EQUITY (Cont.)

| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | The options
  outstanding as of December 31, 2007, have been separated into exercise price
  categories as follows:

|                           |  |                                                     |  |                                                     |  |                                       |  |                                                     |  |                                                                  | 
|-------------------------- |  | --------------------------------------------------- |  | --------------------------------------------------- |  | ------------------------------------- |  | --------------------------------------------------- |  | ---------------------------------------------------------------- | 
|Ranges of
  exercise price |  | Options
  outstanding
  as of
  December 31,
  2007 |  | Weighted
  average
  remaining
  contractual
  life |  | Weighted
  average
  exercise
  price |  | Options
  exercisable
  as of
  December 31,
  2007 |  | Weighted
  average
  exercise
  price of
  exercisable
  options | 
|                           |  |                                                     |  |                                                     |  |                                       |  |                                                     |  |                                                                  | 
|$                          |  |                                                     |  | (Years)                                             |  | $                                     |  |                                                     |  | $                                                                | 
|                           |  |                                                     |  |                                                     |  |                                       |  |                                                     |  |                                                                  | 
|                           |  |                                                     |  |                                                     |  |                                       |  |                                                     |  |                                                                  | 
|2.46                       |  | 167,105                                             |  | 5.75                                                |  | 2.46                                  |  | 167,105                                             |  | 2.46                                                             | 
|8.59
  - 9.99              |  | 575,480                                             |  | 4.87                                                |  | 9.66                                  |  | 227,334                                             |  | 9.79                                                             | 
|10.30
   12.43            |  | 821,121                                             |  | 3.81                                                |  | 11.22                                 |  | 421,448                                             |  | 11.06                                                            | 
|14.00                      |  | 94,160                                              |  | 4.59                                                |  | 14.00                                 |  | 47,080                                              |  | 14.00                                                            | 
|                           |  |                                                     |  |                                                     |  |                                       |  |                                                     |  |                                                                  | 
|                           |  |                                                     |  |                                                     |  |                                       |  |                                                     |  |                                                                  | 
|                           |  | 1,657,866                                           |  | 4.42                                                |  | 9.95                                  |  | 862,967                                             |  | 9.22                                                             | 
|                           |  |                                                     |  |                                                     |  |                                       |  |                                                     |  |                                                                  | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | e. | Modification
  of options:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | On July 1,
  2006, Shamirs former Chief Finance Officer has resigned from his position in
  Shamir. As of the resignation date, 33,486 of his options, which were unvested
  and were not expected to be vested as of the resignation date, were
  cancelled. The vesting period of the remaining 66,974 options was accelerated
  such that they were all fully vested as of July 1, 2006. The contractual term
  of the remaining options was extended until July 31, 2008. As a result,
  Shamir recorded additional compensation cost in the amount of $ 80 in 2006.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In May 2006,
  Shamir granted, 70,000 options to consultants, exercisable for a period of 7
  years pursuant to the terms of the 2005 General Share and Incentive Plan. In
  April 2007, the consultants became employees of Shamir. They were granted
  70,000 options as employees replacing these options granted to them as
  consultants, with the same terms.                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | f. | SII share
  option plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | On June 8,
  2005, the Companys subsidiary SII, granted 90 options to acquire SIIs
  shares to certain of its officers. Weighted average exercise price of
  $ 10,888, vesting- 60% at grant date and 40% on January 1, 2006. The options
  contractual life was 10 years from the grant date. On December 29, 2005 the
  option grant was cancelled. Compensation expenses related to SIIs option
  plan were $ 308 in the year ended December 31, 2005.                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | g. | Dividend:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | On June 27,
  2007, Shamir declared a dividend of $ 4,000 ($0.244 per share), which was paid
  in July 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-42

---

---

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

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Manpower
  agreement with Kibbutz Shamir (the Kibbutz):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | On February
  9, 2005, the Company entered into a manpower agreement with the Kibbutz,
  which replaced a similar agreement from 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | 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 $ 1,347, $ 1,317 and $ 1,241 for the years ended
  December 31, 2005, 2006 and 2007, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | 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.

F-43

---

---

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

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 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 $ 335, $ 338 and $ 379 for the
  years ended December 31, 2005, 2006 and 2007, 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 22 months. Rental payments under the
  amended agreement are the same as under the prior agreement. The facilities
  are subleased from the Kibbutz, which has a long term lease on the property
  from the ILA. The ILA may cancel the lease 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | On June 4,
  2006, the Company signed a memorandum of understanding with Shalag Industries
  Ltd. (Shalag), a subsidiary of the Kibbutz, pursuant to which the Company
  rented 120 square meters for SSOP. This memorandum of understanding provided
  offices for the same rental amounts as the sublease agreement with the
  Kibbutz, as described above. On December 15, 2007, the Company terminated the
  memorandum of understanding with Shalag.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-44

---

---

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

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | On March 8,
  2007, the Companys shareholders at their special shareholders meeting
  resolved that in lieu of such lease, the Company and the Kibbutz enter into a
  lease agreement pursuant to which the Company will lease the new facility of
  SSOP 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, the 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 $ 292, $ 301 and $ 326 for the
  years ended December 31, 2005, 2006 and 2007, 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 is to be repaid in equal quarterly installments over a
  period of four (4) years commencing on March 31, 2005, through deductions of the
  rental fees the Company pays to the Kibbutz. The loan bears interest at 1.5%
  per year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | At the
  Companys shareholders special general meeting of August 8, 2005, the
  Companys shareholders approved a loan to the Kibbutz in an amount no greater
  than $ 4,400, which bears annual interest at a variable rate equal to annual
  LIBOR plus 1.5%. The loan provided the Kibbutz with funds for the
  construction of a building on the Kibbutzs territory for the use of Shamir.
  At the Companys shareholders special general meeting of March 8, 2007, the
  Companys shareholders approved the termination of the loan. As of March 31,
  2007, the loan was fully repaid.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-45

---

---

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

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

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

|                                |  |                         |     |      |   |       |   |   |       |  
|------------------------------- |  | ----------------------- | --- | ---- | - | ----- | - | - | ----- | -
|                                |  | Year ended December 31, |    
|                                |  |                         |    
|                                |  | 2005                    |     | 2006 |   | 2007  |  
|                                |  |                         |     |      |   |       |  
|                                |  |                         |    
|Revenues                        |  | $                       | -   |      | $ | 1,109 |   | $ | 1,615 |  
|                                |  |                         |     |      |   |       |   |   |       |  
|                                |  |                         |    
|Cost of revenues                |  |                         | 970 |      |   | 1,022 |   |   | 886   |  
|                                |  |                         |     |      |   |       |   |   |       |  
|                                |  |                         |    
|Research and development        |  |                         | 126 |      |   | 130   |   |   | 171   |  
|                                |  |                         |     |      |   |       |   |   |       |  
|                                |  |                         |    
|Selling and marketing           |  |                         | 235 |      |   | 184   |   |   | 245   |  
|                                |  |                         |     |      |   |       |   |   |       |  
|                                |  |                         |    
|General and administrative      |  |                         | 642 |      |   | 621   |   |   | 839   |  
|                                |  |                         |     |      |   |       |   |   |       |  
|                                |  |                         |    
|Financial and other income, net |  |                         | (8  | )    |   | (50   | ) |   | (41   | )
|                                |  |                         |     |      |   |       |   |   |       |  

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

|                                                          |  |             |       |      |   |     | 
|--------------------------------------------------------- |  | ----------- | ----- | ---- | - | --- | 
|                                                          |  | December 31 |      
|                                                          |  |             |      
|                                                          |  | 2006        |       | 2007 |  
|                                                          |  |             |       |      |  
|                                                          |  |             |       |      |   |     | 
|Trade receivables                                         |  | $           | 829   |      | $ | 475 | 
|                                                          |  |             |       |      |   |     | 
|Other accounts receivable and prepaid
  expenses (Note 4) |  |             | 93    |      |   | 90  | 
|                                                          |  |             |       |      |   |     | 
|Loan to related party                                     |  |             | 1,297 |      |   | -   | 
|                                                          |  |             |       |      |   |     | 
|Trade payables                                            |  |             | -     |      |   | 75  | 
|                                                          |  |             |       |      |   |     | 
|Accrued expenses and other liabilities
  (Note 11)        |  |             | 390   |      |   | 230 | 
|                                                          |  |             |       |      |   |     | 

|          |                                         
|--------- | ----------------------------------------
|NOTE 18:- | MAJOR CUSTOMER ANDGEOGRAPHIC 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, 2005, 2006 and 2007 and as of December 31, 2005, 2006 and 2007,
  respectively:                                                                                                                  

|              |  |                  |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |         |  |   |        | 
|------------- |  | ---------------- | ------ | ------------------- | - | ---------------- |  | ------------------- | ------ | ---------------- | - | ------------------- |  | - | ------- |  | - | ------ | 
|              |  | 2005             |        | 2006                |   | 2007             | 
|              |  |                  |        |                     |   |                  | 
|              |  | Total
  revenues |        | Long-lived
  assets |   | Total
  revenues |  | Long-lived
  assets |        | Total
  revenues |   | Long-lived
  assets | 
|              |  |                  |        |                     |   |                  |  |                     |        |                  |   |                     | 
|              |  |                  |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |         |  |   |        | 
|Israel        |  | $                | 787    |                     | $ | 11,293           |  | $                   | 853    |                  | $ | 13,886              |  | $ | 1,892   |  | $ | 20,530 | 
|United States |  |                  | 26,047 |                     |   | 4,668            |  |                     | 30,077 |                  |   | 5,007               |  |   | 36,681  |  |   | 5,163  | 
|Europe        |  |                  | 46,404 |                     |   | 13,887           |  |                     | 50,747 |                  |   | 19,016              |  |   | 63,230  |  |   | 23,914 | 
|Asia          |  |                  | 4,099  |                     |   | -                |  |                     | 9,560  |                  |   | -                   |  |   | 12,695  |  |   | -      | 
|Others        |  |                  | 3,027  |                     |   | -                |  |                     | 6,043  |                  |   | 568                 |  |   | 5,921   |  |   | 520    | 
|              |  |                  |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |         |  |   |        | 
|              |  |                  |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |         |  |   |        | 
|              |  | $                | 80,364 |                     | $ | 29,848           |  | $                   | 97,280 |                  | $ | 38,477              |  | $ | 120,419 |  | $ | 50,127 | 
|              |  |                  |        |                     |   |                  |  |                     |        |                  |   |                     |  |   |         |  |   |        | 

F-46

---

---

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

|          |                                                 
|--------- | ------------------------------------------------
|NOTE 18:- | MAJOR CUSTOMER ANDGEOGRAPHIC INFORMATION (Cont.)

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

|                  |  |                         |        |      |   |        |  |   |         | 
|----------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------- | 
|                  |  | Year ended December 31, |       
|                  |  |                         |       
|                  |  | 2005                    |        | 2006 |   | 2007   | 
|                  |  |                         |        |      |   |        | 
|                  |  |                         |        |      |   |        |  |   |         | 
|Lenses            |  | $                       | 72,520 |      | $ | 90,387 |  | $ | 113,945 | 
|Design
  services |  |                         | 7,844  |      |   | 6,893  |  |   | 6,474   | 
|                  |  |                         |        |      |   |        |  |   |         | 
|                  |  |                         |        |      |   |        |  |   |         | 
|                  |  | $                       | 80,364 |      | $ | 97,280 |  | $ | 120,419 | 
|                  |  |                         |        |      |   |        |  |   |         | 

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

|           |  |  |  |    |  |  |    |  |    |  
|---------- |  |  |  | -- |  |  | -- |  | -- | -
|Customer A |  |  |  | *) |  |  | *) |  | 10 | %
|           |  |  |  |    |  |  |    |  |    |  

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

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

| |  |                         |  |      |  |      |  |  |  | 
| |  | ----------------------- |  | ---- |  | ---- |  |  |  | 
| |  | Year ended December 31,
| |  |                        
| |  | 2005                    |  | 2006 |  | 2007 | 
| |  |                         |  |      |  |      | 
| |  |                         |  |      |  |      |  |  |  | 

| |    |                                            |  |  |  |  |  |  |  |  |  | 
| | -- | ------------------------------------------ |  |  |  |  |  |  |  |  |  | 
| | a. | Financial and other income (expenses), net |  |  |  |  |  |  |  |  |  | 

|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|-------------------------------------------------------------------------------------------------------- |  | - | ------ | - | - | ------ | - | - | ------ | -
|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|Financial expenses:                                                                                      |  |   |        |   |   |        |   |   |        |  
|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|Interest in respect of long-term loans                                                                   |  | $ | (431   | ) | $ | (805   | ) | $ | (1,319 | )
|Interest in respect of short-term loans                                                                  |  |   | (355   | ) |   | (816   | ) |   | (818   | )
|Other                                                                                                    |  |   | (393   | ) |   | (631   | ) |   | (445   | )
|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|                                                                                                         |  |   | (1,179 | ) |   | (2,252 | ) |   | (2,582 | )
|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|Financial income:                                                                                        |  |   |        |   |   |        |   |   |        |  
|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|Income in respect of loans to related
  parties                                                          |  |   | 25     |   |   | 48     |   |   | 55     |  
|Income in respect of cash and cash
  equivalents, marketable securities and other short-term investments |  |   | 1,053  |   |   | 1,577  |   |   | 1,359  |  
|Changes in derivatives fair value                                                                        |  |   | 251    |   |   | 60     |   |   | 539    |  
|Foreign currency translation, net                                                                        |  |   | 100    |   |   | 163    |   |   | 383    |  
|Other                                                                                                    |  |   | 18     |   |   | 412    |   |   | 177    |  
|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|                                                                                                         |  |   | 1,447  |   |   | 2,260  |   |   | 2,513  |  
|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|Other income (expenses)                                                                                  |  |   | 133    |   |   | (167   | ) |   | (170   | )
|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|                                                                                                         |  |   |        |   |   |        |   |   |        |  
|Financial and other income (expenses), net                                                               |  | $ | 401    |   | $ | (159   | ) | $ | (239   | )
|                                                                                                         |  |   |        |   |   |        |   |   |        |  

F-47

---

---

|                                                           
|-----------------------------------------------------------
|SHAMIR OPTICAL INDUSTRY LTD.  AND ITS SUBSIDIARIES         
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (expect 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, |       
| |    |                                                                                     |  |                         |       
| |    |                                                                                     |  | 2005                    |        | 2006 |   | 2007   | 
| |    |                                                                                     |  |                         |        |      |   |        | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    | Numerator for basic and diluted net earnings
  per share -                          |  |                         |        |      |   |        |  |   |        | 
| |    | Net income available to shareholders                                                |  | $                       | 8,105  |      | $ | 6,460  |  | $ | 8,201  | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| | 2. | Denominator
  (in thousands):                                                       |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    | Denominator for basic net earnings per
  share -                                    |  |                         |        |      |   |        |  |   |        | 
| |    | Weighted average shares - shareholders
  equity                                    |  |                         | 15,360 |      |   | 16,257 |  |   | 16,339 | 
| |    | Weighted average shares - temporary equity                                          |  |                         | 89     |      |   | -      |  |   | -      | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    | Weighted average number of shares                                                   |  |                         | 15,449 |      |   | 16,257 |  |   | 16,339 | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    | Effect of dilutive securities:                                                      |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    | Add - Employee stock options                                                        |  |                         | 420    |      |   | 291    |  |   | 213    | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                         | 420    |      |   | 291    |  |   | 213    | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 
| |    | Denominator for diluted net earnings per
  share - adjusted weighted average shares |  |                         | 15,869 |      |   | 16,548 |  |   | 16,552 | 
| |    |                                                                                     |  |                         |        |      |   |        |  |   |        | 

F-48

---

---

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

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

| |    |                                                                                                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | Inventory
  provision:                                                                                                                                             
| |    |                                                                                                                                                                    
| |    | The change
  in the inventory provision for slow-moving inventory and discontinued
  products for the years ended December 31, 2005, 2006 and 2007, are as follows:

|                                        |  |                         |       |      |   |       |   |   |       |  
|--------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                        |  | Year ended December 31, |      
|                                        |  |                         |      
|                                        |  | 2005                    |       | 2006 |   | 2007  |  
|                                        |  |                         |       |      |   |       |  
|                                        |  |                         |       |      |   |       |   |   |       |  
|Balance at the beginning of the
  year  |  | $                       | 1,159 |      | $ | 1,036 |   | $ | 990   |  
|Inventory provision                     |  |                         | 9     |      |   | (17   | ) |   | 238   |  
|Inventory written-off                   |  |                         | (49   | )    |   | (90   | ) |   | (180  | )
|Foreign currency translation adjustment |  |                         | (83   | )    |   | 61    |   |   | 67    |  
|                                        |  |                         |       |      |   |       |   |   |       |  
|                                        |  |                         |       |      |   |       |   |   |       |  
|Balance at the end of the year          |  | $                       | 1,036 |      | $ | 990   |   | $ | 1,115 |  
|                                        |  |                         |       |      |   |       |   |   |       |  

| |    |                                                                                                                            
| | -- | ---------------------------------------------------------------------------------------------------------------------------
| | d. | Allowance
  for doubtful accounts:                                                                                         
| |    |                                                                                                                            
| |    | The changes
  in the allowance for doubtful accounts for the years ended December 31, 2005,
  2006 and 2007 are as follows:

|                                        |  |                         |      |      |   |       |   |   |       |  
|--------------------------------------- |  | ----------------------- | ---- | ---- | - | ----- | - | - | ----- | -
|                                        |  | Year ended December 31, |     
|                                        |  |                         |     
|                                        |  | 2005                    |      | 2006 |   | 2007  |  
|                                        |  |                         |      |      |   |       |  
|                                        |  |                         |      |      |   |       |   |   |       |  
|Balance at the beginning of the
  year  |  | $                       | 533  |      | $ | 474   |   | $ | 1,053 |  
|Doubtful accounts provision             |  |                         | 261  |      |   | 553   |   |   | 1,096 |  
|Bad-debts written-off                   |  |                         | (245 | )    |   | (20   | ) |   | (167  | )
|Foreign currency translation adjustment |  |                         | (75  | )    |   | 46    |   |   | 158   |  
|                                        |  |                         |      |      |   |       |   |   |       |  
|                                        |  |                         |      |      |   |       |   |   |       |  
|Balance at the end of the year          |  | $                       | 474  |      | $ | 1,053 |   | $ | 2,140 |  
|                                        |  |                         |      |      |   |       |   |   |       |  

|          |                  
|--------- | -----------------
|NOTE 20:- | SUBSEQUENT EVENTS

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | During the
  first quarter of 2008, one of the banks informed a Shamir subsidiary that it
  wishes to re-negotiate the terms of the short-term credit and long-term loans
  that were granted by that bank to the subsidiary.  In May 13, 2008, the
  subsidiary and the bank executed an amendment to the repayment terms of the
  credit and loans following which it shall be fully repaid up to April 1,
  2009.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | b. | On January
  14, 2008, the Company declared a dividend of $ 4,000 ($0.244 per share), which
  was paid in February 2008.                                                                                                                                                                                                                                                                                            

F-49

---

---

SIGNATURES

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

| |                             
| | ----------------------------
| | SHAMIR OPTICAL INDUSTRY LTD.
| |                             
| | By: /s/ Eyal Hayardeny      
| |                             
| | Eyal Hayardeny              
| | Chief Executive Officer     
| |                             
| | By: /s/ Yagen Moshe         
| |                             
| | Yagen Moshe                 
| | Chief Financial Officer     

Date: June 26, 2008

---

---

# 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
(File 000-51183), 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 (File               000-51183), 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 (incorporated by reference to Exhibit 99.3 to our
registration statement               on Form S-8 (File 333-137628), filed with the SEC on
September 28, 2006)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.14 |  | Working
Service Agreement dated July 19, 2007, between Shamir and Kibbutz Shamir  (English translation)
|---- |  | -------------------------------------------------------------------------------------------------------

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

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

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

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

|13.1 |  | Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section
1350,               as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



---

---