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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



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Form 20-F

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| |   |                                                                                                                                   | 
| | - | --------------------------------------------------------------------------------------------------------------------------------- | 
| | 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) OFTHE SECURITIES EXCHANGE ACT OF
1934For the fiscal year ended December 31,
2004  | 
| |   | OR                                                                                                                                | 
| | o | TRANSITION REPORT
  PURSUANT TO SECTION 13 or 15(d) OFTHE SECURITIES EXCHANGE ACT OF
1934For the transition
  period from      to | 

Commission File
Number 0-51183



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|                                                        
|--------------------------------------------------------
|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)



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KIBBUTZ SHAMIR
UPPER GALILEE12135 ISRAEL(Address of principal
executive offices)



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

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



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SECURITIES TO
BE REGISTERED PURSUANT TO SECTION 12(G) OF THE
ACT:  NONESecurities for
which there is a reporting obligation pursuant to
Section 15(d) of the
Act:  NONE
Indicate the number of outstanding shares of each of
the issuers classes of
capital or common stock as of the close of the
period covered by the annual
report:

|Ordinary
  Shares, 0.01 NIS par value, referred  to in this document as common shares | 16,111,332
|------------------------------------------------------------------------------------- | ----------

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 which
financial statement item the registrant has elected
to follow

Item 17o  Item 18 
x

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TABLE OF
CONTENTS

|                                      |           |                                                                                |  |   
|------------------------------------- | --------- | ------------------------------------------------------------------------------ |  | --
|CERTAIN
  DEFINED TERMS               |           | iii                                                                           
|                                      |           |                                                                               
|FORWARD-LOOKING
  STATEMENTS          |           | iii                                                                           
|                                      |           |                                                                               
|ENFORCEABILITY
  OF CIVIL LIABILITIES |           | iv                                                                            
|                                      |           |                                                                               
|PART I                                |           |                                                                                |  | 1 
|                                      | ITEM 1.   | IDENTITY
  OF DIRECTORS; SENIOR MANAGEMENT AND
ADVISERS                        |  | 1 
|                                      | ITEM 2.   | OFFER STATISTICS AND
EXPECTED TIMETABLE                                        |  | 1 
|                                      | ITEM 3.   | KEY
INFORMATION                                                                |  | 1 
|                                      | ITEM 4.   | INFORMATION ON THE
COMPANY                                                     |  | 15
|                                      | 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                                                          |  | 55
|                                      | ITEM 9.   | THE OFFER AND
LISTING                                                          |  | 56
|                                      | ITEM 10.  | ADDITIONAL
INFORMATION                                                         |  | 57
|                                      | ITEM 11.  | QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET
  RISK                   |  | 67
|                                      | ITEM 12.  | DESCRIPTION OF SECURITIES
OTHER THAN EQUITY
  SECURITIES                       |  | 67
|                                      |           |                                                                                |  |   
|PART II                               |           |                                                                                |  | 68
|                                      | ITEM 13.  | DEFAULTS, DIVIDEND
ARREARAGES AND DELINQUENCIES                                |  | 68
|                                      | ITEM
14.  | MATERIAL MODIFICATIONS TO
THE RIGHTS OF SECURITY
  HOLDERS AND USE OF PROCEEDS |  | 68
|                                      | ITEM 15.  | CONTROLS AND
PROCEDURES                                                        |  | 69
|                                      | ITEM 16.  | [RESERVED]                                                                     |  | 69
|                                      | ITEM 16A. | AUDIT COMMITTEE FINANCIAL
EXPERT                                               |  | 69
|                                      | ITEM 16B. | CODE OF
ETHICS                                                                 |  | 69
|                                      | ITEM 16C. | PRINCIPAL ACCOUNTANT FEES
AND SERVICES                                         |  | 69
|                                      | 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                              |           |                                                                                |  | 71
|                                      | ITEM 17.  | FINANCIAL
  STATEMENTS                                                         |  | 71
|                                      | ITEM 18.  | FINANCIAL
  STATMENTS                                                          |  | 71
|                                      | ITEM 19.  | EXHIBITS                                                                       |  | 71
|                                      |           |                                                                                |  |   
|SIGNATURES                            |           | 72                                                                            
|                                      |           |                                                                               

ii

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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 twelve member states of the
European Union, NIS refers
to New Israeli shekel, and dollar,
USD or $ refers to U.S.
dollars.

We own
rights in the following trademarks in various
jurisdictions world-wide: Shamir Genesis, Genesis, Shamir Piccolo, Piccolo, Shamir Office, Shamir Creation, Shamir
Autograph, Autograph, Prescriptor, Eye Point Technology and the Shamir name and logo. Our main trademarks are registered or are in the process of being registered in the United States, the
 European Union, Canada and additional countries in which we operate. All other trademarks or tradenames referred to in this annual
report are the property of their respective owners.

FORWARD-LOOKING
STATEMENTS

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

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

| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the effects
  of competition in our industry, and changes in our
relationships with optical
  laboratories, distributors, research and
development partners and other third
  parties;                                                                     
| |   |                                                                                                                                                                                                                                                            
| |  | the effects
  of the international expansion of our operations
and our ability to manage
  our growth, including our ability to manage
potential future acquisitions;                                                                                      
| |   |                                                                                                                                                                                                                                                            
| |  | our ability
  to timely develop and market new or enhanced
products and the effects of
  developments in alternative technologies and
treatments in our industry;                                                                                          
| |   |                                                                                                                                                                                                                                                            
| |  | our ability
  to protect our proprietary technology and
intellectual property rights;                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                            
| |  | our ability
  to capitalize on our research and development
capabilities;                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                            
| |  | our ability
  to retain or recruit key personnel;                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                            
| |  | our
  relationship with Kibbutz Shamir;                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                            
| |  | the effects
  of exchange rate fluctuations;                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                            
| |  | the
  political, military and economic conditions in
Israel;                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                            
| |  | our success
  at managing the risks of the foregoing;
and                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                            
| |  | the other
  factors referenced in this annual report,
including, without limitation, in
  the sections entitled Item 3. Key
InformationRisk Factors, Item 5.
  Operating and Financial Review and Prospect
and Item 4. Information on the
  Company.

iii

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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.

ENFORCEABILITY
OF CIVIL LIABILITIES

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

| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the judgment
  was rendered by a court which was, according to
the laws of the jurisdiction
  of the court, competent to render the
judgment;                                                                   
| |   |                                                                                                                                                                                                                 
| |  | the judgment
  is no longer appealable;                                                                                                                                                                         
| |   |                                                                                                                                                                                                                 
| |  | the
  obligation imposed by the judgment is enforceable
according to the rules
  relating to the enforceability of judgments in
Israel and the substance of
  the judgment is not contrary to public policy;
and
| |   |                                                                                                                                                                                                                 
| |  | the judgment
  can be executed in the country in which it was
given.                                                                                                                                            

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

| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the judgment
  was obtained by fraud;                                                                                                                                
| |   |                                                                                                                                                                      
| |  | there was no
  due process;                                                                                                                                          
| |   |                                                                                                                                                                      
| |  | the judgment
  was rendered by a court not competent to render it
according to the laws of
  private international law in Israel;                                    
| |   |                                                                                                                                                                      
| |  | the judgment
  is at variance with another judgment that was
given in the same matter
  between the same parties and which is still valid;
or                        
| |   |                                                                                                                                                                      
| |  | at the time the
  action was brought in the foreign court, a suit in
the same matter and
  between the same parties was pending before a
court or tribunal in Israel.

iv

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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

Corporate
Reorganization

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

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

On
March 6, 2005 we changed the structure of our
company from an A.C.S. into
an Israeli limited liability company. To do so, we
relied on a provision of the
Israeli Companies Law that allows such a
reorganization without having to
transfer any assets, rights or liabilities into a
new entity and by using the
same entity of the A.C.S. in order to change its
form into a limited liability
company, which is not considered as a taxable event.
As part of this
reorganization and in preparation for the March 2005
offering, we adopted new
articles of association and restructured our share
capital by splitting the
105,506 existing shares so that each share with a
par value of NIS 1.00 was
divided into 100 common shares with a par value of
NIS 0.01 each. In addition,
we distributed to our shareholders out of our equity
2,160,732 new common
shares with a par value of NIS 0.01 each. With this
distribution, the old
shares of the A.C.S. were in effect split at a ratio
of 120.48-to-one, and our
total issued and outstanding share capital then
amounted to NIS 127,113
consisting of 12,711,332 common shares with a par
value of NIS 0.01 each. We
also created authorized share capital of 100,000,000
common shares with a par
value of NIS 0.01 each. In addition, as part of this
reorganization, the
shareholdings held by the various entities listed
above that are owned by
Kibbutz Shamir were combined into one entity. As
part of the initial public
offering of our common shares, which closed on March
16, 2005, we issued
3,400,000 new common shares with a par value of NIS
0.01 each, so that our
share capital now amounts to NIS 161,113 consisting
of 16,111,332 common shares
with a part value of NIS 0.01 each. See also
Item 10. Additional
InformationShare Capital.

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

1

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Selected Financial Data

We prepare
our consolidated financial statements in accordance
with accounting principles
generally accepted in the United States (U.S. GAAP).
The following data have
been derived from our audited consolidated financial
statements as of and for
the five years ended December 31, 2000, 2001,
2002, 2003 and 2004, 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, 2003
and 2004 and the related audited consolidated
statements of income and of cash
flows for each of the three years in the period
ended December 31, 2004,
together with the notes thereto, appear elsewhere in
this annual report.

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

|                                                     |  |                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|---------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ | - | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                     |  | Year Ended
  December 31, |       
|                                                     |  |                           |       
|                                                     |  | 2000                      |        | 2001 |   | 2002   |   | 2003 |        | 2004 |  
|                                                     |  |                           |        |      |   |        |   |      |        |      |  
|(Dollars in thousands)                               |  |                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|                                                     |  |                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|STATEMENT OF OPERATIONS
DATA:                        |  |                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Revenues, net                                        |  | $                         | 15,807 |      | $ | 29,386 |   | $    | 48,738 |      | $ | 60,079 |   | $ | 71,269 |  
|Cost of revenues                                     |  |                           | 5,646  |      |   | 14,724 |   |      | 24,318 |      |   | 29,955 |   |   | 33,414 |  
|Gross profit                                         |  |                           | 10,161 |      |   | 14,662 |   |      | 24,420 |      |   | 30,124 |   |   | 37,855 |  
|Operating expenses:                                  |  |                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Research and
development costs                       |  |                           | 1,551  |      |   | 1,488  |   |      | 1,594  |      |   | 1,988  |   |   | 1,842  |  
|Selling and
marketing expenses                       |  |                           | 2,256  |      |   | 4,411  |   |      | 10,659 |      |   | 13,756 |   |   | 18,902 |  
|General and
administrative
  expenses                |  |                           | 1,785  |      |   | 2,656  |   |      | 2,756  |      |   | 3,564  |   |   | 4,502  |  
|Stock-based
compensation
  expenses(1)               |  |                           |       |      |   | 173    |   |      |       |      |   | 1,809  |   |   | 82     |  
|Total operating expenses                             |  |                           | 5,592  |      |   | 8,728  |   |      | 15,009 |      |   | 21,117 |   |   | 25,328 |  
|Operating income                                     |  |                           | 4,569  |      |   | 5,934  |   |      | 9,411  |      |   | 9,007  |   |   | 12,527 |  
|Financial and other expenses, net                    |  |                           | 250    |      |   | 395    |   |      | 1,600  |      |   | 1,064  |   |   | 864    |  
|Income before taxes on
income                        |  |                           | 4,319  |      |   | 5,539  |   |      | 7,811  |      |   | 7,943  |   |   | 11,663 |  
|Taxes on income                                      |  |                           | 17     |      |   | 77     |   |      | 979    |      |   | 1,095  |   |   | 1,549  |  
|Income after taxes on
income                         |  |                           | 4,302  |      |   | 5,462  |   |      | 6,832  |      |   | 6,848  |   |   | 10,114 |  
|Equity in losses of affiliates,
net                  |  |                           | 87     |      |   | 377    |   |      | 367    |      |   | 47     |   |   | (48    | )
|Minority interest in losses
(earnings) of subsidiary |  |                           | 20     |      |   | 62     |   |      | (244   | )    |   | (1,564 | ) |   | (1,254 | )
|Net income                                           |  | $                         | 4,235  |      | $ | 5,147  |   | $    | 6,221  |      | $ | 5,237  |   | $ | 8,812  |  
|Pro forma additional taxes on income
(unaudited)(2)  |  |                           | (717   | )    |   | (631   | ) |      | (1,075 | )    |   | (1,187 | ) |   | 1,707  |  
|Pro forma net
income(2)                              |  | $                         | 3,518  |      | $ | 4,516  |   | $    | 5,146  |      | $ | 4,050  |   | $ | 7,105  |  
|Net earnings per share:                              |  |                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Basic                                                |  | $                         | 0.41   |      | $ | 0.44   |   | $    | 0.52   |      | $ | 0.43   |   | $ | 0.70   |  
|Diluted                                              |  |                           | 0.36   |      |   | 0.43   |   |      | 0.52   |      |   | 0.43   |   |   | 0.68   |  
|Pro forma earnings per share
(unaudited):(2)         |  |                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Basic                                                |  | $                         | 0.34   |      | $ | 0.39   |   | $    | 0.43   |      | $ | 0.33   |   | $ | 0.56   |  
|Diluted                                              |  |                           | 0.30   |      |   | 0.38   |   |      | 0.43   |      |   | 0.32   |   |   | 0.55   |  
|Weighted average number of
shares                    |  |                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Basic                                                |  |                           | 10,241 |      |   | 11,602 |   |      | 12,048 |      |   | 12,048 |   |   | 12,625 |  
|Diluted                                              |  |                           | 11,634 |      |   | 11,946 |   |      | 12,048 |      |   | 12,133 |   |   | 12,961 |  
|Weighted average shares used for
pro forma(2)        |  |                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Basic                                                |  |                           | 10,241 |      |   | 11,602 |   |      | 12,048 |      |   | 12,419 |   |   | 12,625 |  
|Diluted                                              |  |                           | 11,634 |      |   | 11,946 |   |      | 12,048 |      |   | 12,505 |   |   | 12,961 |  

2

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|                            |  |                      |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|--------------------------- |  | -------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                            |  | As of
  December 31, |       
|                            |  |                      |       
|                            |  | 2000                 |        | 2001 |   | 2002   |  | 2003 |        | 2004 |  
|                            |  |                      |        |      |   |        |  |      |        |      |  
|(Dollars in thousands)      |  |                      |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|                            |  |                      |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|FINANCIAL POSITION
DATA:(3) |  |                      |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|Cash and cash equivalents   |  | $                    | 610    |      | $ | 2,742  |  | $    | 2,808  |      | $ | 6,033  |  | $ | 6,235  | 
|Working capital             |  |                      | 1,443  |      |   | 3,568  |  |      | 8,622  |      |   | 10,035 |  |   | 7,825  | 
|Total assets                |  |                      | 13,429 |      |   | 33,867 |  |      | 41,705 |      |   | 52,922 |  |   | 65,344 | 
|Total liabilities           |  |                      | 7,160  |      |   | 25,225 |  |      | 25,323 |      |   | 31,696 |  |   | 40,344 | 
|Temporary equity(4)         |  |                      | 4,120  |      |   |       |  |      |       |      |   |       |  |   | 3,000  | 
|Total debt                  |  |                      | 3,759  |      |   | 13,570 |  |      | 11,929 |      |   | 16,785 |  |   | 19,507 | 
|Total shareholders equity  |  |                      | 2,126  |      |   | 7,315  |  |      | 11,549 |      |   | 14,945 |  |   | 14,630 | 

|    |                                                         
|--- | --------------------------------------------------------
|   
|(1) | Stock-based compensation expenses
include the following:

| |                                       |  |                           |   |      |   |      |  |      |   |      |   |       |  |   |    | 
| | ------------------------------------- |  | ------------------------- | - | ---- | - | ---- |  | ---- | - | ---- | - | ----- |  | - | -- | 
| |                                       |  | Year Ended
  December 31, |  
| |                                       |  |                           |  
| |                                       |  | 2000                      |   | 2001 |   | 2002 |  | 2003 |   | 2004 |  
| |                                       |  |                           |   |      |   |      |  |      |   |      |  
| | (Dollars in thousands)                |  |                           |   |      |   |      |  |      |   |      |   |       |  |   |    | 
| |                                       |  |                           |   |      |   |      |  |      |   |      |   |       |  |   |    | 
| | Research and development costs        |  | $                         |  |      | $ |     |  | $    |  |      | $ | 1,809 |  | $ |   | 
| | Selling and marketing expenses        |  |                           |  |      |   | 173  |  |      |  |      |   |      |  |   | 13 | 
| | General and administrative
  expenses |  |                           |  |      |   |     |  |      |  |      |   |      |  |   | 69 | 
| | Total                                 |  | $                         |  |      | $ | 173  |  | $    |  |      | $ | 1,809 |  | $ | 82 | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The pro forma adjustments give
effect to our reorganization into an
  Israeli limited liability company (see
Corporate Reorganization, above),
  pursuant to which 105,506 shares in our original
corporate entity, an Israeli
  agricultural co-operative society (A.C.S.) were
exchanged into 12,711,332
  common shares of Shamir Optical Industry Ltd.
As the A.C.S. was a
  pass-through tax entity, the tax liability was not
charged to our company but
  to the owners, pro rata to their holding in the
A.C.S. For comparison purposes,
  we have included in our financial statements and
in the selected consolidated
  financial data in this annual report our pro forma
net income, which reflects
  the additional income taxes we would have paid
during the historical periods
  presented, assuming we had been a limited
liability company during that time.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(3) | Since the end of our 2004 fiscal
year, we have reorganized our
  company into an Israeli limited liability company
and conducted an initial
  public offering and listing on the Nasdaq National
Market of our common
  shares. See Corporate
Reorganization, above. As the reorganization
and the offering of our
  shares had a significant impact on our financial
position data, we are
  including  for comparison purposes only
 our unaudited consolidated
  financial position data as of March 31, 2005, our
first and hitherto only
  reporting date following the reorganization and
IPO. The following table
  shows this data.                                                                                                                                                                                                                                  

|                           |  |                        |   |         |  | 
|-------------------------- |  | ---------------------- | - | ------- |  | 
|                           |  | As of
  March 31, 2005 |  
|                           |  |                        |  
|(Dollars in thousands)     |  | (unaudited)            |  
|FINANCIAL POSITION DATA:   |  |                        |   |         |  | 
|Cash and cash equivalents  |  |                        | $ | 46,993  |  | 
|Working capital            |  |                        |   | 53,354  |  | 
|Total assets               |  |                        |   | 107,467 |  | 
|Total liabilities          |  |                        |   | 36,956  |  | 
|Temporary equity(4)        |  |                        |   |        |  | 
|Total debt                 |  |                        |   | 15,224  |  | 
|Total shareholders equity |  |                        |   | 63,114  |  | 

|    |                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Represents
  shares of the company owned by Kibbutz Eyal for
which Kibbutz Eyal had a
  right to put the shares to us. This put option
expired upon the
  reorganization of our company from an A.C.S. to a
limited liability company.

3

---

---



Capitalization
and Indebtedness

Not applicable

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 |  |  | 2000  |  |  | 2001  |  |  | 2002  |  |  | 2003  |  |  | 2004  | 
| |          |  |  |       |  |  |       |  |  |       |  |  |       |  |  |       | 
| | EUR      |  |  | 1.082 |  |  | 1.122 |  |  | 1.025 |  |  | 0.860 |  |  | 0.794 | 
| | NIS      |  |  | 4.077 |  |  | 4.206 |  |  | 4.738 |  |  | 4.548 |  |  | 4.482 | 

On
June 15, 2005 the exchange rate was NIS 4.482 per $1.00 and 0.83 per $1.00, as
reported by the Bank of Israel.

Market Data

This
annual report contains information, statistical data and predictions about our
industry and the size of our markets. We operate in an industry in which it is
difficult to obtain precise industry and market information. We are not aware
of any exhaustive industry and market reports from public sources or industry
umbrella organizations. The data contained in Item 4.  Information on the CompanyIndustry
Overview and certain other market data in this annual report is derived from
an industry study that we commissioned from Strategy With Vision Ltd.
(SWV), a U.K. consulting firm to the eyewear and eye care industries, for the
year 2003. In compiling the data for this study, SWV relied on published
figures and on data it compiled from various participants in the industry. To
calculate market size and value, SWV used estimates from companies that are
active in the relevant markets, net selling prices of lens manufacturers and
its own estimates of optical retail mark-ups. We believe that the industry and
market information contained in the annual report provides fair and accurate
estimates of the size of our markets.

Reasons for the Offer and Use of Proceeds

Not
applicable.

Risk Factors

Any
investment in our shares involves a high degree of risk. You should consider
carefully the specific risk factors described below in addition to the other
information contained in this annual report before making a decision to invest
in our shares. If any of these risks actually occur, the trading price of our
shares could decline and you may lose part or all of your investment.

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

---

---



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

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

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

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

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

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

We
derive substantially all of our revenues from sales outside of Israel and a
significant majority from sales outside of Israel and the United States. During
2004 we generated approximately 68.0% of our revenues from sales outside of
Israel and the United States, including 62.4% in Europe. We also sell our
products in Australia, Canada, South Africa, South America, and China and other
countries in East and South-East Asia. An integral part of our expansion
strategy is to enter new foreign markets, principally in China and other Asian
countries, and to further penetrate those foreign markets in which we are currently
active. Our ability to penetrate certain international markets may be limited,
and our international sales and operations and our expansion strategy are
subject to numerous risks inherent in international business activities,
including:

| |   |                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | developments
  in the political and economic environment of some foreign countries,
  primarily in Asia and South America, that have an adverse effect on our
  operations in those countries, including the fact that customers in some
  jurisdictions may not do business with an Israeli company;
| |   |                                                                                                                                                                                                                                                                                                      
| |  | the
  imposition of tariffs or exchange controls, technology export license
  requirements or other trade restrictions;                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                      
| |  | difficulty
  in managing a large organization spread through various countries, including
  staffing and managing foreign operations;                                                                                                                                                                

5

---

---



| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulty
  enforcing agreements and collecting receivables through certain foreign legal
  systems, in particular in developing markets in Asia and South America;
| |   |                                                                                                                                                                     
| |  | longer
  payment cycles for foreign customers than for customers in the United States;                                                                              
| |   |                                                                                                                                                                     
| |  | currency
  exchange risks, in particular between the dollar and the NIS and the dollar
  and the euro;                                                              
| |   |                                                                                                                                                                     
| |  | difficulties
  in complying with a variety of foreign laws and regulations;                                                                                         
| |   |                                                                                                                                                                     
| |  | tax rates in
  certain foreign countries that exceed those in Israel, and withholding
  requirements on foreign earnings;                                           
| |   |                                                                                                                                                                     
| |  | greater
  difficulty in safeguarding intellectual property in certain jurisdictions, in
  particular in China and other Asian countries; and                        
| |   |                                                                                                                                                                     
| |  | difficulties
  in adapting our products to different country-specific requirements.                                                                                 

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

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

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

| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | rapid
  technological change;                                                   
| |   |                                                                                 
| |  | short
  product life cycles and frequent product introductions and enhancements;
| |   |                                                                                 
| |  | evolving industry
  performance standards; and                                  
| |   |                                                                                 
| |  | changes in
  customer and end-user requirements.                                

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

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

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

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

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

6

---

---



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

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

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

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

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

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

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

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

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

7

---

---



| |   |                                                          
| | - | ---------------------------------------------------------
| |  | limit the
  value of our trade secrets or know how;      
| |   |                                                          
| |  | subject us
  to significant liabilities to third parties;
| |   |                                                          
| |  | require us to
  seek licenses from third parties; or     
| |   |                                                          
| |  | prevent us
  from manufacturing and selling products,    

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

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

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

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

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

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

We intend to
continue our policy of acquisitions. These acquisitions could divert our
resources, create unanticipated expenses, disrupt our business and adversely
affect our financial condition.

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

8

---

---



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

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

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

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

We
have an exclusive arrangement with Altra, a distributor in Europe of which we
own 51%, and with Shamir Insight Inc., a distributor in the United States
of which we owned 57% as of December 31, 2004 and 59% as of the date of this
annual report. Sales in Europe through Altra and in the United States through
Shamir Insight accounted for approximately 78.6% of our total sales in 2004.
Should these distributors not perform to our expectations or should other
distributors provide vendors or end-users with better incentives than Altra or
Shamir Insight, our sales will suffer, which will have a direct and adverse
impact on our financial condition and results of operations.

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

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

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

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

9

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

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

| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | variations
  in the timing of orders and shipments of our products and services;                                      
| |   |                                                                                                                       
| |  | variations
  in the demand from and the size of orders by our customers;                                              
| |   |                                                                                                                       
| |  | the timing
  and success of new product or technology introductions by us or our
  competitors;                       
| |   |                                                                                                                       
| |  | the pricing
  and profitability of our products or the timing of aggressive low-pricing
  policies by our competitors;
| |   |                                                                                                                       
| |  | changes in
  the availability or cost of raw materials;                                                               
| |   |                                                                                                                       
| |  | seasonal
  variations in customer spending in Europe and the United States;                                           
| |   |                                                                                                                       
| |  | the timing
  of technological innovations for our products or those of our competitors;                               
| |   |                                                                                                                       
| |  | our ability
  to bring new products into volume production efficiently;                                               
| |   |                                                                                                                       
| |  | shifts in
  market and industry emphasis and end-user demands; and                                                    
| |   |                                                                                                                       
| |  | market
  conditions in the ophthalmic industry and in the economy as a whole.                                         

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

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

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

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

We
operate globally, and our financial results are subject to both transaction and
translation effects resulting from fluctuations in currency exchange rates. We
generate our revenues in euros and dollars, and we incur a significant portion
of our expenses, principally salaries and related expenses of our staff in
Israel, in NIS. In 2004 we generated approximately 36% of our revenues in
dollars and 60% in euros, and we incurred approximately 20% of our expenses in
NIS, 29% in dollars and 47% in euros. Exchange rate fluctuations between the
dollar and the euro materially impact our revenues, cost of revenues and other
operating expenses. See Item 5.
Operating and Financial Review and ProspectsFunctional Currency and
Exchange Rate Fluctuations. We currently do not hedge our currency exposure
through financial instruments.

10

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

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

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

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

Risks Related to Our Relationship with
Kibbutz Shamir

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

Following
the initial public offering of our common shares in March 2005, our majority
shareholder, Kibbutz Shamir, currently holds 58.1% of our shares. As a result,
this single shareholder has sufficient voting power to effectively control all
matters concerning our company that require shareholder approval. For example,
Kibbutz Shamir may have the power to affect our legal and capital structure; to
elect all of our directors; to prevent or effect changes in our control or
management; to approve or reject changes to our operations or strategic
direction; to amend our articles of association and change the rights attached
to our shares; and to determine whether we may enter into mergers or other
business combination transactions in which shareholders could receive a premium
over the prevailing market price for our shares. Kibbutz Shamir has
contractually agreed with another shareholder to vote for that shareholders
nominee for membership on our board. See Item 7.  Major Shareholders and Related Party Transactions.

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

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

11

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

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

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

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

Risks Related to Our Shares

The trading price of
our shares may fluctuate substantially.

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

| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the gain or
  loss of significant orders or customers;                                                                                                          
| |   |                                                                                                                                                                 
| |  | actual or
  anticipated variations in our operating results or a variance in our
  financial performance from the expectations of market analysts;              
| |   |                                                                                                                                                                 
| |  | announcements
  of technological innovations, new products or product enhancements, strategic
  alliances or significant agreements by us or by our competitors;
| |   |                                                                                                                                                                 
| |  | conditions and
  trends in the end markets we serve and changes in the estimates of the sizes
  and growth rates of these markets                               
| |   |                                                                                                                                                                 
| |  | recruitment
  or departure of key personnel;                                                                                                                    
| |   |                                                                                                                                                                 
| |  | changes in
  our pricing policies or the pricing policies of our competitors;                                                                                   
| |   |                                                                                                                                                                 
| |  | changes in
  the estimates of our operating results or changes in recommendations by any
  securities analysts that elect to follow our common shares;          
| |   |                                                                                                                                                                 
| |  | changes in
  market valuation or earnings of our competitors;                                                                                                   
| |   |                                                                                                                                                                 
| |  | changes in
  legislation;                                                                                                                                       
| |   |                                                                                                                                                                 
| |  | the trading
  volume of our shares; and                                                                                                                         
| |   |                                                                                                                                                                 
| |  | market
  conditions in our industry, the industries of our customers and the economy
  as a whole.                                                              

12

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

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

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

Following
the initial public offering of our common shares in March 2005, those of our
shareholders who held shares prior to the offering currently hold approximately
71.4% of our outstanding shares. These shareholders are not contractually
prohibited from transferring our shares following the 180-day lock-up period
after the March 2005 offering. The shareholders may also transfer their shares
prior to the expiration of the 180-day lock-up period with the consent of William
Blair & Company, L.L.C., in its sole discretion. In addition, after
the expiration of the 180-day lock-up period, we could issue and sell
additional shares, subject to the controlling shareholders consent. See Item
7.  Major Shareholder and Related Party
Transactions. Any sale by us or our pre-offering shareholders of our shares
into the public market, or the perception that sales could occur, could
adversely affect the prevailing market price for our shares.

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

Provisions of our
articles of association and Israeli law could inhibit the acquisition of us by
others.

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

| |   |                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | establishing
  advance notice requirements for director nominations or other proposals at
  shareholder meetings;                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                    
| |  | generally
  requiring the affirmative vote of holders of at least 75% of the voting power
  of our outstanding voting shares to amend any provision in our articles of
  association, which could make it more difficult for a third party to remove
  the provisions we have included to prevent or delay a change of control; and
| |   |                                                                                                                                                                                                                                                                                                                                    
| |  | providing
  for staggered terms for the members of our board of directors.                                                                                                                                                                                                                                                         

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

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

13

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Risks Relating to Our Operations in Israel

Conducting business
in Israel entails special risks.

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

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

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

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

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

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

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

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

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

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

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

14

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ITEM 4. INFORMATION ON THE COMPANY

Overview

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

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

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

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

History

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

Industry Overview

According
to Strategy With Vision (SWV)1,
an independent industry research firm, the global ophthalmic retail market was
approximately $52 billion in 2003, consisting of various segments,
including frames, spectacle lenses, contact lenses and optical accessories. The
spectacle lens segment makes up the largest portion of this market,
representing approximately 45% or $24 billion of the global ophthalmic
market in 2003. The global progressive spectacle lens market represents
approximately $12.1 billion or 51% of the $24 billion spectacle lens
market and is expected to grow to $18.6 billion in 2010, representing a
compound annual growth rate of 6.3% between 2003 and 2010.

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

15

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

Lenses and
Alternatives

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Single Vision Lenses. Single
  vision lenses have only one optical power and are primarily used to correct
  deficiencies in either near or distant vision. Global sales of single vision
  lenses in 2003 were approximately $8.5 billion and 324.4 million
  pairs of lenses, representing an average price of $26 per pair. As they are
  essentially simple magnifying glasses when used to treat near-sightedness,
  single vision lenses tend to be cheaper than other types of lenses and are
  readily available in most markets in the world.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Bifocal Lenses.  Bifocal
  lenses have two optical powers and are used to correct deficiencies in both
  near and distant vision. The surface of the bifocal lens is typically divided
  into two parts, the upper portion for distant vision and part of the lower
  portion for near vision. The division between the two parts of the lens is
  clearly visible and forces the eyes to make an abrupt transition. Global
  sales of bifocal lenses in 2003 were approximately $2.9 billion and
  49.7 million pairs of lenses, representing an average price of $58 per
  pair.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Progressive Lenses. Progressive
  lenses utilize complex designs to combine several optical powers for
  different viewing distances, with the optical power gradually increasing from
  the upper portion of the lens to the lower portion of the lens. The transition
  between powers is gradual and seamless, thereby eliminating distracting lines
  between the different vision areas and allowing the user to see at various
  distances without an image jump, restrictive focal lengths or demarcation
  lines, although some users have difficulty adapting to the distortion areas
  of progressive lenses. Global sales of progressive lenses in 2003 were
  approximately $12.1 billion and 51.7 million pairs of lenses,
  representing an average price of $234 per pair, and are expected to grow to
  $18.6 billion and 65.6 million pairs of lenses, for an average
  price of $283 per pair, in 2010. Progressive lenses are generally the most
  expensive type of lenses and are less frequently covered by insurance than
  single vision or bifocal lenses.

The
following charts show the market for spectacle lenses by pairs and dollar value
for 2003:

(MARKET FOR SPECTACLE LENSES CHART)

---

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.

16

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Market Growth

The
progressive lens segment is estimated to grow at a compound annual growth rate
of 6.3% from $12.1 billion in 2003 to $18.6 billion in 2010, while
the total spectacles lens market is estimated to grow at a compound annual
growth rate of 3.5% from $23.5 in 2003 to $29.8 billion in 2010. The
United States and Europe represent the two largest and fastest-growing markets
for progressive lenses among developed countries. The United States is the
fastest-growing developed geographic market for progressive lenses, with an
expected compound annual growth rate of 8.8%, from $4.1 billion in 2003 to
an estimated $7.4 billion in 2010. The European progressive lens market is
expected to experience a compound annual growth rate of 4.9% from
$5.3 billion in 2003 to an estimated $7.4 billion in 2010. In
addition, the rate of progressive lens penetration in developing countries
including India and China is very low relative to developed countries and is
expected to increase significantly.

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased Awareness.  Over the past few years, there has been an
  increasing number of advertising, marketing, promotional and educational
  programs supported by progressive lens manufacturers to increase public
  awareness of progressive lenses and their advantages. We expect the
  progressive lens market to continue to benefit from these programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Shift From Bifocal Lenses.  Progressive lenses will continue to
  benefit from the shift in demand away from bifocal lenses to progressive
  lenses as a superior treatment for presbyopia. In the United States, the
  progressive lens market is expected to grow by nearly $3.3 billion
  between 2003 and 2010, while the bifocal market is expected to decrease by $200 million
  during the same period. In Europe, the progressive lens market is expected to
  grow by nearly $2.1 billion between 2003 and 2010, while the bifocal
  market is expected to decrease by $200 million during the same period.
  As technologies evolve and more people begin to require treatment for
  presbyopia, we expect that the market shift from bifocal to progressive
  lenses will accelerate. The following table shows the actual and estimated
  market sizes for the years 2000, 2003 and 2010, as well as the estimated
  compound annual growth rate in the United States, Europe and the world from
  2000 to 2010.

|                        |  |      |     |      |   |      |  |      |      |  |  |      |  
|----------------------- |  | ---- | --- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|(Dollars
  in billions) |  | 2000 |     | 2003 |   | 2010 |  | CAGR |     
|                        |  |      |     |      |   |      |  |      |     
|United States           |  |      |     |      |   |      |  |      |      |  |  |      |  
|Progressive             |  | $    | 3.2 |      | $ | 4.1  |  | $    | 7.4  |  |  | 8.7  | %
|Bi-Focal                |  | $    | 1.2 |      | $ | 1.1  |  | $    | 0.9  |  |  | -2.8 | %
|Europe                  |  |      |     |      |   |      |  |      |      |  |  |      |  
|Progressive             |  | $    | 4.1 |      | $ | 5.3  |  | $    | 7.4  |  |  | 6.1  | %
|Bi-Focal                |  | $    | 1.1 |      | $ | 0.9  |  | $    | 0.7  |  |  | -4.4 | %
|Total World             |  |      |     |      |   |      |  |      |      |  |  |      |  
|Progressive             |  | $    | 9.8 |      | $ | 12.1 |  | $    | 18.6 |  |  | 6.6  | %
|Bi-Focal                |  | $    | 3.3 |      | $ | 2.9  |  | $    | 2.3  |  |  | -3.5 | %



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

17

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

Market
Structure

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

(MARKET STRUCTURE FLOW CHART)

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.

Competitive Strengths

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

Research
and Development Expertise

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

Leading
Products for the Progressive Lens Market

When we
began operations in the progressive lens field, we were among the first
companies in the world engaged in the design, development and marketing of
progressive lenses, and we have focused exclusively on progressive lenses since
1995. According to SWV, the progressive lens market represented approximately
51.5% of the $24 billion global spectacle lens market in 2003and is the fastest growing segment of the
optical lens market with the highest average sales price and the most
attractive margins. Our concentration on progressive lenses has enabled us to
develop lens designs and technologies to produce lenses that are considered
among the best-performing lenses in the industry. Our leading product portfolio
includes Shamir Genesis, our general purpose lens, Shamir Piccolo for use in
small frames, Shamir Office for viewing distances common to an office
environment, and Shamir Autograph, which is based on our Direct Lens Technology
to allow greater customization of the lens.

18

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Strong
Distribution Channels

We have
created two separate distribution strategies for our two principal markets, the
United States and Europe, that are specifically tailored to our target
customers in each market. Our sales in Europe accounted for $44.5 million,
or 62.4%, of our revenues in 2004, and sales in the United States accounted for
$21.9 million, or 30.8%, during the same period. In Europe, where there
has been significant consolidation and, as a result, fewer optical laboratories
unaffiliated with lens manufacturers or retail chains remain (see Marketing
and Distribution), we sell directly to retail optical shops through our
vertically integrated optical laboratories in Portugal and the United Kingdom,
as well as through our distribution center in Spain. We also sell directly to
optical laboratories through our distribution center in Germany.

In the
United States, vertical integration of manufacturers and optical laboratories
is less prevalent, which has resulted in a strong customer base made up of more
than 100 of the approximately 300 independent U.S. laboratories. Unlike many of
our competitors, we have not acquired independent optical laboratories in the
United States. We believe that this strategy eliminated an inherent conflict of
interest that many of our competitors face when trying to establish a customer
relationship with independent laboratories with whom they are also competing
for customers. As a result, we are one of the few leading manufacturers not in
direct competition with independent laboratories in the United States. We
believe that this strategy has contributed to the expansion of our U.S. sales
from approximately $14.8 million in 2001 to approximately $21.9 million
in 2004, representing a compound annual growth rate of 14.1%.

Ability
to Leverage Resources

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

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

Strong
Ownership, Dedicated Workforce and Experienced Management Team

Kibbutz
Shamir is our largest shareholder and holds 58.1% of our outstanding shares.
Kibbutz Shamir was founded in 1944 and is a small communal society of
approximately 270 members, including 38 of our 311 employees in Israel. As with
most kibbutzim, each member of Kibbutz Shamir owns an equal part of the assets
of Kibbutz Shamir. Kibbutz Shamir has been successful in developing and
encouraging a creative and dedicated managerial and entrepreneurial team to
manage the businesses owned by Kibbutz Shamir, including two companies listed
on the Tel Aviv stock exchange, Shalag Industries, Ltd. and N.R. Spuntech
Industries, Ltd.

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

19

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Growth Strategy

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

Maintain
Technological Leadership

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

Capitalize
on Positive Demographic Trends and Increase Penetration

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

Increase
Share in Key Markets

We plan
to
expand our sales in Europe by acquiring additional optical laboratories 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 and the United Kingdom. We plan to significantly increase our
presence in the United States by expanding our sales force and increasing our
marketing programs. We plan to increase awareness and brand recognition
world-wide by participating in trade shows, seminars and conventions, and
hosting presentations for optometrists, opticians and ophthalmologists. We
believe that greater brand recognition, combined with the quality of our
products, will enable us to expand our business with existing laboratory
customers and generate additional business from potential new customers.

Expand
into New Geographic Markets

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

Implement
New Approach of Designing and Manufacturing Personal Lenses

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

20

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Focus
on Value-Added Materials

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

Products

Our
products consist of lenses that we sell to optical laboratories and design
services, including molds, that we sell to optical lens manufacturers under
service and royalty agreements. During 2004 revenues from our sales of lenses
accounted for 90.2% of our total revenues, while revenues from our sales of
design services accounted for 9.8% of our total revenues.

Lenses

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

|                 |  |                                                                                                                |  |                                 |  |                                                                   
|---------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ------------------------------- |  | ------------------------------------------------------------------
|Brand            |  | Characteristics                                                                                                |  | Available Materials             |  | Other                                                             
|                 |  |                                                                                                                |  |                                 |  |                                                                   
|Shamir Genesis   |  | All-purpose progressive lens                                                                                   |  | Plastic, Mineral, Trivex        |  | Ranked #1 by Optometry journal for fit heights 18 and 22.(1)    
|Shamir Office    |  | Designed for visual clarity from 1.3 ft. to 10 ft. Allows
  comfort for people working in closed environments. |  | Plastic, Mineral                |  |                                                                   
|                
|Shamir Piccolo   |  | Designed to fit into any small frame.                                                                          |  | Plastic, Mineral, Polycarbonate |  | Ranked #1 by Optometry journal for fit heights 16, 18
and 22.(1)
|Shamir AutoGraph |  | Customized back surface progressive lens. Produced using free form
  technology.                               |  | Plastic                         |  |                                                                   



---

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

21

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Design
Services

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

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

Research and
Development

Our
research and development group, which includes approximately 39engineers,
mathematicians, physicists, chemists, programmers and optical technicians, is
considered one of the worlds pre-eminent research and development teams for
development of progressive lenses, molds, and complementary technologies and
tools. We constantly enhance our capabilities and invest resources in order to
develop new innovative products and related tools designed to optimize the
production processes. Innovation, technological sophistication and rigorous
quality assurance practices have enabled us to position ourselves as a clear technology
leader in the progressive segment of the lens market and contributed to our
growth.

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

Research
and Development Teams

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

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

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

Optical
Laboratory. Our 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.

22

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

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our
  subsidiary Inray Ltd. engages in the research and development of
  algorithms and software that facilitate the development of tools for
  designing lenses and optimizing their optical characteristics. We own 50.03%
  of the shares and 50% of the voting rights in Inray, and Dymotech Ltd.,
  a company controlled by the Technion Israel Institute of Technology, and two
  of the Technions researchers own one-sixth of the voting rights each. We
  believe that the technologies developed by Inray are not only relevant to the
  field of optics and vision lenses, but also germane to developing software to
  improve vision in the field of contact lenses and measurement of the cornea
  of the eye prior to surgical operations to repair vision.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Shamir
  Or Ltd. is seeking to develop innovative lenses based on diffractive
  optics, the manipulation of lens characteristics by means of fine notching on
  the lens that affects the direction of rays of light. This technology would
  enable us to improve the optical characteristics of the lens.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | E-vision LLC
  is exploring the use of electroactive technologies to create lenses that can
  change refractive powers to allow users to focus their vision at varying
  distances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Marketing and
Distribution

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

Lenses

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

23

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United
States. The U.S. ophthalmic market is characterized
by a large number of laboratories, many of which are independent, as well as
large national retail chains and buying groups, some of which own their own
laboratories. We currently market and distribute our products in the United
States directly to independent laboratories, using our marketing subsidiary
Shamir Insight, which has pursued a proactive marketing campaign through its
sales force. Our marketing platform aims to build brand recognition for our
lenses through its focus on progressive lenses and sponsorship of industry
seminars attended by optometrists, opticians and ophthalmologists. Unlike many
of our competitors, we made a strategic decision not to acquire independent
optical laboratories in the United States in order not to compete with these
laboratories. We focus our U.S. marketing efforts on these laboratories, and
our independent status has enabled us to achieve significant growth in this
market. To support our marketing efforts and further educate the market on
progressive lenses, we developed our ReCreating Perfect Vision promotional
campaign, in which more than 100 independent laboratories have participated,
and utilize the Eye-View software, a proprietary program that illustrates
differences in lens quality and design. To expand and maintain the quality of
our sales force, Shamir Insight only hires account executives with at least
five years experience as qualified opticians and has created an advanced sales
training program through which it educates all new executives.

Europe. The
European ophthalmic market has experienced significant consolidation of optical
laboratories, and fewer of these laboratories remain unaffiliated with lens
manufacturers or retail chains. As a result, the conflict of interest that
exists in the United States when acquired laboratories compete directly with
independent laboratories (who are also potential customers) is less pronounced
in Europe simply because there are fewer independent laboratories; any
potential benefit to be gained from not acquiring laboratories and thereby not competing
with the remaining independent laboratories is much smaller. In Europe, we
market and sell our products through our subsidiary Altra. Altra relies on two
primary distribution channels. The first channel is comprised of Altras
distribution centers and optical laboratories in Germany, Spain, Portugal,
France and the United Kingdom. From these locations, we distribute progressive
lenses and also offer a variety of non-progressive lenses that we source from
other manufacturers in order to provide the market with a comprehensive
offering of optical lenses. In each of our locations, we employ a professional,
well trained sales force that builds our brand name through direct sales
efforts and attendance at conventions, presentations and trade shows. Our state
of the art distribution center in Germany maintains an inventory of several
thousand varieties of semi-finished progressive, bifocal and single vision
lenses and finished single vision lenses, has significant capacity, and enables
us to provide just-in-time deliveries of nearly any size order to anywhere in
Europe. The second channel we pursue consists of optical laboratories, chains
and buying groups that market our products primarily under a private label. Due
to our delivery capabilities, variety of finished and semi-finished lenses, and
customer service provided by our laboratories and distribution centers, we
believe we can increase our business with our existing customers while
simultaneously obtaining business from new opticians, optical laboratories,
retail chains and buying groups.

The
Rest of the World. We market and sell our products in the rest
of the world through distributor relationships or directly to optical
laboratories. We have established relationships with distributors in several
markets, which we intend to develop so that they distribute only our products
as we have done in other parts of the world. We also plan to explore vertical
acquisitions of optical laboratories where appropriate to maintain and increase
our market share. In addition, we participate in many international optical
trade shows, such as OLA and Vision Expo in the United States, Silmo in Paris,
Mido in Milan, and also local trade shows in China, India, South Africa,
Brazil, Spain, Portugal and the United Kingdom.

Design
Services

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

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

Customers

Our
customers are optical laboratories and opticians for spectacle lenses and
third-party lens manufacturers for design services. During 2004 our two largest
customers accounted for 14% of our revenues. Our largest customer accounted for
approximately 8% of our revenues during 2004. The remaining 86% of our revenues
are spread across more than 200 customers, and no other customer, other
than our two largest customers, accounted for more than 6% of our revenues.

24

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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
laboratory in Portugal and will begin production at our optical laboratory in the
United Kingdom in the near future.

Production
of Semi-Finished Plastic Lenses

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

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

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

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

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

Production
of Finished Plastic Lenses by Free Form Technology

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

Production
of Glass Molds and Semi-Finished Glass Lenses

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

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

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

25

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

The
process
for producing 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.

Free
Form Production of Glass Molds

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

Competition

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

Competition
in our industry is based primarily on technological innovation and product
quality, as well as on breadth of product offerings, customer service and
price. Price competition can be severe in the spectacle lens industry,
especially in certain geographic markets and for high-volume, standardized
products. We attempt to counter this competition to the extent possible by
offering what we believe are among the highest quality progressive lenses in
the market. We believe that our sales of progressive lenses constituted less
than 5% of the global progressive lens market in 2004.  We also believe that our providing research
and development services gives us a competitive advantage over other progressive
lens manufacturers who sell only finished products to the market.

Facilities

Our
principal executive offices and our primary manufacturing facilities are
located in Kibbutz Shamir in northern Israel and in Kibbutz Eyal in central
Israel. At these facilities we produce molds and semi-finished glass and
plastic lenses. See Manufacturing Operations. We sublease the facilities in
Shamir from Kibbutz Shamir. See Item 7.
Major Shareholders and Related Party Transactions. Together, the Shamir
and Eyal facilities cover approximately 5,370 square meters of
manufacturing space, 1,950 square meters of warehouses and
1,130 square meters of office space.

We also
own
optical laboratories in Portugal and the United Kingdom, which occupy approximately
2,000 square meters and 1,400 square meters of owned and leased
manufacturing and office space, respectively. In addition, on June 27, 2005,
one of our partially owned subsidiaries established a laboratory facility in
Turkey. In establishing this facility, our subsidiary acquired certain assets (mainly inventory and fixed assets) of
the laboratory from another laboratory in Turkey in a transaction with a value
of approximately 2 million. Our partially owned distributors in the United
States, France, Germany, Spain and Portugal also lease or own storage and
office facilities in which they conduct their operations.

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

|                          |  |                             |  |                                             |  |              |  |             
|------------------------- |  | --------------------------- |  | ------------------------------------------- |  | ------------ |  | ------------
|Name/Location             |  | Company                     |  | Primary Use                                 |  | Size         |  | Leased/Owned
|                          |  |                             |  |                                             |  |              |  |             
|Kibbutz Shamir, Israel    |  | Shamir Optical Industry Ltd |  | Headquarters, administration; manufacturing |  | 4,700 sq. m. |  | Leased      
|Kibbutz Eyal, Israel      |  | Shamir Optical Industry Ltd |  | Manufacturing                               |  | 3,750 sq. m. |  | Leased      
|Vilar, Portugal           |  | Altra Optica Lda.           |  | Optical laboratory                          |  | 2,000 sq. m. |  | Owned       
|Niederau, Germany         |  | Altra Trading GmbH          |  | Distribution warehouse                      |  | 1,765 sq. m. |  | Owned       
|San Diego, California     |  | Shamir Insight, Inc.        |  | Distribution warehouse                      |  | 744 sq. m.   |  | Leased      
|Cambridge, United Kingdom |  | Cambridge Optical           |  | Optical laboratory                          |  | 1,400 sq. m. |  | Leased      

26

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We
anticipate that we will use a portion of the net proceeds of the March 2005
offering of our shares to fund the construction of new production lines in a
new manufacturing facility for high index lenses adjacent to our current
facilities in Shamir. We expect to spend approximately $8.0 million dollars to
construct this facility, and we currently anticipate that construction of the
facility will begin in the second half of 2005 and will be completed during
2006.

Intellectual Property

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, 2004, we held two U.S. patents directly and five
through our subsidiary Inray, and several patent applications covering our
innovative algorithms and methods of designing multifocal surfaces. We own
rights in the following trademarks in various jurisdictions world-wide: Shamir and the Shamir
logo, Shamir Genesis, Genesis, Shamir
Piccolo, Piccolo, Shamir Office,
Shamir Creation, Shamir Autograph, Autograph, Prescriptor
and Eye Point Technology. 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.

Regulation

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

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

Environmental Matters

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.

27

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Corporate Structure

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

(CORPORATE STRUCTURE FLOW CHART)



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of December 31, 2004, Shamir had a 56.7% ownership interest in
  Shamir Insight, Inc. and held a 56.7% of the voting power in Shamir
  Insight, Inc.  In April 2005,
  Shamir purchased an additional 2.0% of the ownership interest and the voting
  power in Shamir Insight Inc.  In
  addition, Shamir is entitled to vote the shares held by Shamir USAs
  president, Michael Latzer, in Shamir Insight, Inc., which amount to an
  additional 10% of the voting power in Shamir Insight, Inc.  We are currently in discussions with some
  of the other shareholders in Shamir Insight, Inc. to purchase their holdings
  in the company.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(2) | Shamir has a 50.03% ownership interest and holds 50% of the voting
  rights in Inray Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(3) | Shamir has a 19.8% ownership interest and holds 19.5% of the voting
  rights in E-vision LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The subsidiaries and equity investments shown in the chart above
  engage in the following business activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |   |                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Eyal Optical
  Industries (1995) Ltd., in which we acquired a 25% stake in 1997
  and 100% in 2003, manufactures Shamir plastic progressive and other
  lenses. We hold Eyal Optical Industries through Eyal Optical Holdings
  A.C.S. Ltd.                                                                   
| |   |                                                                                                                                                                                                                                                                                                               
| |  | Shamir
  USA, Inc., which we established in 1994, is one of our marketing and
  distribution companies in the United States.                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                               
| |  | Shamir
  Insight, Inc., which we established with our partner Severn in 1999, is
  our main marketing and distribution company in the United States.                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                               
| |  | Altra
  Trading GmbH, in which we acquired our stake in 2001, is our main
  marketing and distribution company in Europe.                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                               
| |  | Inray Ltd.,
  jointly owned by us, the Technion Israel Institute of Technology and two of
  its researchers, engages in the research and development of algorithms and
  software for the optics industry to facilitate the development of tools for
  designing lenses and optimizing their optical capacity.
| |   |                                                                                                                                                                                                                                                                                                               
| |  | Shamir
  Or Ltd. seeks to develop innovative lenses based on diffractive optics.
  Diffractive optics provide for thinner lenses through the manipulation of
  lens characteristics by means of fine notching on the lens that affects the
  direction of rays of light.                                      
| |   |                                                                                                                                                                                                                                                                                                               
| |  | E-vision LLC
  is exploring the use of electroactive technologies to create lenses that can
  change refractive powers to allow users to focus their vision at varying
  distances.                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                               
| |  | Interoptic
  SARL is our distributor in Paris, France.                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                               
| |  | Altra Optica
  Espana SL is our distributor in Spain.                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                               
| |  | Altra Optica
  Lda. is our optical laboratory in Portugal, which serves Portugal, Spain and
  other western European countries.                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                               
| |  | Cambridge
  Optical Group Limited is our optical laboratory in the United Kingdom, which
  we acquired in September 2004 and which we hold through JMH
  Holding Ltd.                                                                                                                                         

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ITEM 5. OPERATING AND FINANCIAL REVIEW
AND PROSPECTS

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

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

Overview

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

We
believe
that we have one of the worlds pre-eminent research and development teams for
progressive lenses, molds and complementary technologies and tools. We have
developed software dedicated to the design of progressive lenses. This software
is based on our proprietary mathematical algorithms that optimize designs of
progressive lenses. We have also created software tools specifically designed
for our research and development and production requirements. To maintain our
technological leadership, we have pursued investments in new technologies in the
ophthalmic field and have established several companies that are developing
product technologies in fields such as lens development, lens production and
optical measurement and simulation.

Presentation of
Financials After Reorganization

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

Functional Currency
and Exchange Rate Fluctuations

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

The
functional currency of Altra, our European distribution subsidiary, 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. For 2002, 2003 and 2004, the
translation adjustments between the dollar and the euro materially impacted our
revenues, cost of revenues and other operating expenses.

We
generate
our revenues in euros and dollars, and we incur a significant portion of our
expenses in euros and NIS (principally salaries and related expenses of our
staff in Israel). A fluctuation in the value of the euro compared to the dollar
may have a material impact on our revenues, which is often partially offset by
expenses in euro and by price adjustments for some of our euro-priced products
to compete with competitors dollar-priced products. A fluctuation in the value
of the NIS compared to the dollar may have a material impact on our expenses.
Revenue growth in Europe was 25.2% in 2003 and 21.8% in 2004, and the average
euro-to-dollar exchange rate increased by 16.1% and 7.7% during the same
periods. The impact of these increases on our revenues was partially offset by
price adjustments for our euro-priced products. Please see  Results of
OperationsYear Ended December 31, 2004 Compared To Year Ended December 31,
2003 and Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002 for a discussion and quantification of the effect of
the fluctuations in the exchange rates between the dollar and the other
currencies in which we do business on certain line items of our income
statement.

29

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Revenues, Net

We
generate
revenues both from selling spectacle lenses to laboratories and opticians and
from providing design services to third party manufacturers. Our lenses are
sold primarily under Shamir brands through distributors, including our
majority-owned subsidiaries. Design services are provided under contracts with
other lens manufacturers and include research and development services,
production of molds for lenses, and royalties from the sale of lenses made
utilizing our designs. In the last three years, we have experienced significant
growth in the sale of our lenses, as we have focused our efforts on the
marketing and distribution of our own lenses and as our superior designs gain
greater acceptance in the market. From 2002 to 2004, revenues from the sale of
lenses increased by approximately 58.9%, while revenues from design services
decreased by approximately 15.7%. The decrease in revenues from design services
was due to the completion of the prototype phase of certain major design
projects in 2002. In the prototype phase, we receive revenue mainly at the
beginning of the project until 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. The production
and sales activities from the major design projects for which we completed
research and development in 2002 are not yet material.

We
anticipate
that revenues from the sale of lenses will continue to provide the majority of
our revenues. Our free form technology was only released in the first quarter
of 2004 and has not contributed any significant amount to our revenues.

Lenses

Our
primary
source of revenues is the sale of semi-finished and finished progressive
lenses. Semi-finished lenses are sold through our distributors, Shamir Insight
and Altra; finished lenses are sold throughout Europe by our optical laboratory
in Portugal. We recently acquired, through Altra, an additional European
optical laboratory in Cambridge, England, through which we expect to increase
our sales of finished lenses in the future. Revenues from lenses are recognized
when delivery has occurred.

Design Services

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

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

| |                     |  |                           |        |      |   |        |  |   |        | 
| | ------------------- |  | ------------------------- | ------ | ---- | - | ------ |  | - | ------ | 
| |                     |  | Year Ended
  December 31, |       
| |                     |  |                           |       
| |                     |  | 2002                      |        | 2003 |   | 2004   | 
| |                     |  |                           |        |      |   |        | 
| |                     |  |                           |        |      |   |        |  |   |        | 
| | Lenses              |  | $                         | 40,450 |      | $ | 52,767 |  | $ | 64,282 | 
| | Design services     |  |                           | 8,288  |      |   | 7,312  |  |   | 6,987  | 
| | Total revenues, net |  | $                         | 48,738 |      | $ | 60,079 |  | $ | 71,269 | 

Since
2001
we have focused primarily on expanding our sales to the United States and
Europe, the two largest and most developed markets for our lenses. The increase
in our revenues from the sale of lenses was primarily due to the success of the
increased marketing activities of Shamir Insight, our U.S. lens distribution
subsidiary, and Altra, our European lens distribution subsidiary.  Shamir Insight sales increased from
$4.3 million in 2002 to $13.2 million in 2004. Over this same period,
Altra sales increased from $26.7 million to $40.3 million. In addition to
the distribution through Shamir Insight and Altra, we also sell our lenses
through local distributors in other countries. Aggregate revenues in these
other jurisdictions accounted for approximately 16.7% of our sales of lenses in
2004.

30

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

|                    |  |                           |        |      |   |        |  |   |        | 
|------------------- |  | ------------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                    |  | Year Ended
  December 31, |       
|                    |  |                           |       
|                    |  | 2002                      |        | 2003 |   | 2004   | 
|                    |  |                           |        |      |   |        | 
|                    |  |                           |        |      |   |        |  |   |        | 
|Europe              |  | $                         | 29,156 |      | $ | 36,507 |  | $ | 44,477 | 
|United States       |  |                           | 15,653 |      |   | 19,808 |  |   | 21,938 | 
|Asia                |  |                           | 1,811  |      |   | 2,184  |  |   | 2,454  | 
|Israel              |  |                           | 1,300  |      |   | 906    |  |   | 845    | 
|Others              |  |                           | 818    |      |   | 674    |  |   | 1,555  | 
|Total revenues, net |  | $                         | 48,738 |      | $ | 60,079 |  | $ | 71,269 | 

Cost of Revenues

Our
cost of
revenues consists primarily of manufacturing costs incurred in the production
of lenses and molds, and is comprised mainly of raw materials, salaries and
other personnel expenses for employees engaged in the manufacture of our
products. Other expenses include sub-contractor services, depreciation on
property and equipment, rent and utilities. We expect moderate improvements in
cost of revenues as we improve our efficiency, mainly by reducing waste.

Gross Profit

Our
gross
profit margin has been approximately 50% for each of the past two years, and
53.1% for the year ended December 31, 2004. We have maintained our margins
throughout this period notwithstanding a significant increase in manufacturing
costs corresponding to the significant increase in lens revenues. The decrease
in design service revenues has not had a significant impact on our gross
profit. Our recently acquired optical laboratory in Cambridge, England
currently sells primarily lenses from other manufacturers at lower gross profit
margins than those of our overall business. As a result, it may have a negative
impact on our gross profit margins as of 2005. We expect the gross profit
margin to return to historical levels as the Cambridge laboratory sells more
Shamir brand lenses rather than lenses from other manufacturers.

Research and
Development Costs

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

Selling and Marketing
Expenses

Our
selling
and marketing expenses consist primarily of salaries, commissions and other
personnel-related expenses for those principally engaged in the sales and
marketing of our products. Compensation for subsidiary sales managers and sales
representatives is based to a significant extent on commissions related to
performance. Additional expenses include advertising, trade shows, other
promotional costs, and office expenses related to sales and marketing. We
expect our selling and marketing expenses to increase in absolute dollar terms
as we increase our sales and marketing efforts, primarily in the United States.
Although we do not expect such expenses to increase substantially as a percentage
of our revenues over time, we will incur costs of salaries and other personnel
expenses for new hires before any associated revenues are generated by them.

General and
Administrative Expenses

Our
general
and administrative expenses consist primarily of salaries and other
personnel-related expenses for executive, accounting and administrative
personnel, professional fees, office expenses and other general corporate
expenses. We expect our general and administrative expenses to increase in absolute
dollar terms and as a percentage of revenues due to increased costs resulting
from our becoming a public company.

31

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Financial Expenses,
Net

Financial
expenses consist of interest expenses on borrowings offset by interest received
on short-term deposits. Financial expenses also incorporate the adjustments due
to exchange rate variances.

Stock-Based
Compensation Expenses

We
recorded
stock-based compensation expenses in the amount of $1.8 million in 2003 in
connection with options that were granted to one of our employees on
September 30, 2003. The options granted were fully vested at the grant
date and recorded immediately in our statement of income. In addition, we
recorded stock-based compensation expenses in the amount of $82,000 in
connection with options we issued to acquire 683,120 of our shares at a
weighted average exercise price of $11.07 per share in 2004. We expect that
these grants will result in stock-based compensation expense of approximately
$232,000 per year for each of the next four years. These expenses were
calculated under the provisions of APB No. 25. Upon adoption of SFAS
No. 123(R), these expenses would be higher. At this stage, we have not yet
determined the impact of applying the provisions of SFAS No. 123(R). See
Recent Accounting Pronouncements. We have also approved options to purchase
an additional 288,360 of our shares for issuance in accordance with our boards
resolution regarding stock options of August 24, 2004 for future grants to
our executives and employees. These option grants may result in recognition of
stock-based compensation in future years.
In January 2005 we agreed to grant options to purchase 160,961 of our
common shares to the chairman of our board of directors.  In addition, in March 2005 our board of
directors approved a plan to issue 164,780 options to seven members of our
board of directors.  Under the Israeli
Companies Law, this plan is subject to the approval of our Audit Committee, our
board of directors and our shareholders meeting.  We expect to submit this plan for the remaining required
approvals in the near future.  See Item
7.  Directors, Senior Management and
EmployeesCompensation of Directors and Management and Employee Share
Ownership.

Equity in Earnings
(Losses) of Affiliates, Net

Equity
in
earnings (losses) of affiliates is shown in our consolidated financial
statements primarily to reflect 18.7% and 45% holdings in e-Vision and
Shamir-Or, respectively, as of December 31, 2002 and 18.7% and 50%
holdings in e-Vision and Shamir-Or, respectively, as of December 31, 2003.
In August 2004 we purchased an additional 0.8% of e-Vision, which
increased our holdings in e-Vision to 19.5%.

Minority Interests in
Losses (Earnings) of Subsidiaries

Minority
interests are shown in our consolidated financial statements to reflect our
non-wholly owned subsidiaries. From January 1, 2001 minority interests in
losses (earnings) of subsidiaries included Shamir Insight and Eyal, with a
minority percentage of 43.3% and 49%, respectively. The minority interest in
Eyal decreased to 2% in December 2003 and was eliminated in May 2004
due to our acquisition of the minority interest in Eyal. From July 2002 to
date, the minority percentage in Altra has been 49%.

Pro Forma Additional
Taxes on Income

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

32

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Results of Operations

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

|                                              |  |                           |       |      |  |       |   |  |       |  
|--------------------------------------------- |  | ------------------------- | ----- | ---- |  | ----- | - |  | ----- | -
|                                              |  | Year Ended
  December 31, |      
|                                              |  |                           |      
|                                              |  | 2002                      |       | 2003 |  | 2004  |  
|                                              |  |                           |       |      |  |       |  
|                                              |  |                           |       |      |  |       |   |  |       |  
|Revenues, net                                 |  |                           | 100.0 | %    |  | 100.0 | % |  | 100.0 | %
|Cost of revenues                              |  |                           | 49.9  |      |  | 49.9  |   |  | 46.9  |  
|Gross profit                                  |  |                           | 50.1  |      |  | 50.1  |   |  | 53.1  |  
|Operating expenses:                           |  |                           |       |      |  |       |   |  |       |  
|Research and development costs                |  |                           | 3.3   |      |  | 3.3   |   |  | 2.6   |  
|Selling and marketing expenses                |  |                           | 21.9  |      |  | 22.9  |   |  | 26.5  |  
|General and administrative expenses           |  |                           | 5.7   |      |  | 5.9   |   |  | 6.3   |  
|Stock-based compensation expenses             |  |                           | 0.0   |      |  | 3.0   |   |  | 0.1   |  
|Total operating expenses                      |  |                           | 30.8  |      |  | 35.1  |   |  | 35.5  |  
|Operating income                              |  |                           | 19.3  |      |  | 15.0  |   |  | 17.6  |  
|Financial and other expenses, net             |  |                           | 3.2   |      |  | 1.8   |   |  | 1.2   |  
|Income before taxes on income                 |  |                           | 16.0  |      |  | 13.2  |   |  | 16.4  |  
|Taxes on income                               |  |                           | 2.0   |      |  | 1.8   |   |  | 2.2   |  
|Income after taxes on income                  |  |                           | 14.0  |      |  | 11.4  |   |  | 14.2  |  
|Equity in losses of affiliates, net           |  |                           | (0.8  | )    |  | (0.1  | ) |  | (0.1  | )
|Minority interest in earnings of subsidiaries |  |                           | (0.5  | )    |  | (2.6  | ) |  | (1.7  | )
|Net income                                    |  |                           | 12.8  | %    |  | 8.7   | % |  | 12.4  | %
|Pro forma additional taxes on income          |  |                           | (2.2  | )    |  | (2.0  | ) |  | (2.4  | )
|Pro forma net income                          |  |                           | 10.6  | %    |  | 6.7   | % |  | 10.0  | %

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

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

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

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

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

33

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

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

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

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

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

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

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

Year
Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenues,
Net. Total revenues, net were $60.1 million
for the year ended December 31, 2003, an increase of $11.4 million or
23.3% compared to total revenues, net of $48.7 million for the year ended
December 31, 2002. The increase was primarily attributable to increased
sales in the United States and Europe through our distribution subsidiaries
(Shamir Insight and Altra), as well as the positive impact of exchange rate
fluctuations. Increased marketing activities in the United States resulted in
$4.6 million of sales growth, while strong performance in Europe
contributed $7.5 million (including a positive impact of exchange rate
fluctuations in a gross amount of $4.8 million that was partially offset
by price reductions). In addition, the sale of lenses to the rest of the world
and to other third-party manufacturers contributed $0.2 million of revenue
growth in 2003. Revenues generated from design services decreased by
$1.0 million, primarily due to a reduction in sales of molds.

Cost
of Revenues. Cost of revenues was $30.0 million for
the year ended December 31, 2003, an increase of $5.7 million or
23.2% compared to cost of revenues of $24.3 million for the year ended
December 31, 2002. The increase in cost of revenues was primarily due to
an increase in the number of lenses manufactured and the negative impact of
exchange rate fluctuations of $2.4 million. As a percentage of revenues,
our cost of revenues remained the same between 2002 and 2003.

Research
and Development Costs. Research and development costs
were $2.0 million for the year ended December 31, 2003, an increase
of $0.4 million or 24.7% compared to research and development costs of
$1.6 million for the year ended December 31, 2002. The increase in
research and development costs was primarily attributable to the hiring of
additional engineers. As a percentage of revenues, research and development
costs remained constant between 2002 and 2003.

34

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Selling
and Marketing Expenses. Selling and marketing expenses
were $13.8 million for the year ended December 31, 2003, an increase
of $3.1 million or 29.1% compared to selling and marketing expenses of
$10.7 million for the year ended December 31, 2002. Of the increase,
$1.5 million was attributable to increased sales and marketing activities
in the United States, while the remaining increase was primarily attributable
to increased sales and marketing expense in Europe and the rest of the world
and the negative impact of exchange rate fluctuations. Exchange rate
fluctuations contributed $1.2 million to this increase. Selling and
marketing expenses increased primarily due to an increase in personnel costs
associated with the expansion of our sales and marketing force and the related
commissions. As a percentage of revenues, selling and marketing expenses
increased from 21.9% for the year ended December 31, 2002 to 22.9% the
year ended December 31, 2003.

General
and Administrative Expenses. General and administrative
expenses were $3.6 million for the year ended December 31, 2003, an
increase of $0.8 million or 29.3% compared to general and administrative
expenses of $2.8 million for the year ended December 31, 2002. The
increase was primarily attributable to costs associated with expanding
management and administrative personnel and increased office expenses. As a
percentage of revenues, general and administrative expenses increased from 5.7%
to 5.9% between 2002 and 2003.

Stock-Based
Compensation Expenses. We recorded stock-based
compensation expenses in the amount of $1.8 million in 2003 in connection
with options that were granted to one of our employees on September 30,
2003. The options granted were fully vested at the grant date and recorded
immediately in the statement of income. In 2002 we did not grant any options to
our employees or incur any other stock-based compensation expense.

Financial
and Other Expenses, Net. Financial and other expenses,
net were $1.1 million for the year ended December 31, 2003, a
decrease of $0.5 million or 33.5% compared to financial expenses, net of
$1.6 million for the year ended December 31, 2002. This decrease was
due principally to other expenses in the amount of $0.8 million recorded
in 2002 resulting from a one-time loss in respect of shares sold to the chief
executive officer of Altra at that time. The decrease was partially offset by
an increase of $0.3 million in financial expenses, primarily due to greater
interest expenses on bank loans.

Taxes
on Income. Taxes on income were $1.1 million for
the year ended December 31, 2003, an increase of $0.1 million
compared to taxes on income of $1.0 million for the year ended
December 31, 2002. The increase in taxes on income was primarily
attributable to the increase in earnings at Altra and Shamir Insight.

Pro
Forma Additional Taxes on Income. Pro forma
additional taxes on income were $1.2 million for the year ended 31, 2003,
an increase of $0.1 million compared to pro forma additional taxes on
income of $1.1 million for the year ended December 31, 2002.

Equity
in Losses of Affiliates, Net. Equity in losses of affiliates,
net was less than $0.1 million for the year ended December 31, 2003,
a decrease of $0.4 million compared to equity in earnings of affiliates,
net of $0.4 million for the year ended December 31, 2002. The
decrease of equity in losses of affiliates, net was primarily attributable to
the investment in e-Vision, which was written off through net losses in 2002.

Minority
Interests in Losses (Earnings) of Subsidiaries. Minority
interests in earnings were $1.6 million for the year ended
December 31, 2003, an increase of $1.4 million compared to minority
interest in earnings of $0.2 million for the year ended December 31,
2002. The increase in minority interests in earnings was primarily attributable
to an increase in the shareholding of the minority shareholder in Altra in
July 2002 from 6% to 49%, and to a lesser extent an increase in earnings
of Eyal in 2003.

Seasonality

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

Liquidity and Capital
Resources

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

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As of
December 31, 2004, we had working capital of $7.8 million, cash and cash
equivalents of $6.2 million and undrawn lines of credit of approximately
$11.7 million.

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

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

| |                                           |  |                           |        |      |   |        |   |   |        |  
| | ----------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
| |                                           |  | Year Ended
  December 31, |       
| |                                           |  |                           |       
| |                                           |  | 2002                      |        | 2003 |   | 2004   |  
| |                                           |  |                           |        |      |   |        |  
| |                                           |  |                           |        |      |   |        |   |   |        |  
| | Net cash provided by operating activities |  | $                         | 9,242  |      | $ | 11,483 |   | $ | 8,897  |  
| | Net cash used in investing activities     |  |                           | (3,514 | )    |   | (4,205 | ) |   | (6,012 | )
| | Net cash used in financing activities     |  |                           | (5,740 | )    |   | (4,338 | ) |   | (2,793 | )

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

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

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

Our
operating activities provided cash of $9.2 million, $11.5 million and
$8.9 million for the years ended December 31, 2002, 2003 and
2004, respectively. The change in net cash provided by operating activities
reflects the growth in sales activity as well as our increased profitability
and increasing levels of collection of accounts receivable netted against other
working capital items. As revenues grow, we anticipate that our trade
receivables and inventory will continue to grow, requiring an increase in our
required level of working capital.

Our
investing activities used cash of $3.5 million, $4.2 million and $6.0 million
for the years ended December 31, 2002, 2003 and 2004, respectively. Over
the last three years, cash used in investing activities was primarily driven by
the purchase of property and equipment, as well as the acquisition of our
subsidiary, Cambridge Optical in 2004.

Our
financing activities used cash of $5.7 million, $4.3 million and
$2.5 million for the years ended December 31, 2002, 2003 and
2004, respectively. A principal source of cash from financing activities has
been receipt of long-term loans and short-term bank credit. However, repayment
of long-term loans have either largely offset or exceeded receipt of credit for
each of these periods. Distribution of earnings, which totaled
$4.0 million, $4.3 million and $6.6 million at December 31,
2002, 2003 and 2004, respectively, has been the largest use of cash for
financing activities. In 2004 the increased receipt of long- and short-term
loans was due to the financing of the acquisition of Cambridge Optical.

Borrowings

As of
December 31, 2004, we had aggregate short-term (including current maturities of
long-term loans) and long-term bank borrowings of $13.9 million and
$3.5 million, respectively. These borrowings are divided between our
subsidiaries and us as follows: $9.9 million is held by Altra,
$3.2 million is held by Eyal and $4.3 million is held by us. These
borrowings consist of various notes denominated in dollars, euros, British
pounds and NIS, with interest rates (in various currencies and linked to various
indices) ranging from approximately 3.2% to 6.8%, a weighted average
interest rate of approximately 4%. These aggregate bank borrowings included
short-term bank loans of $9.0 million, mostly denominated in euro, with a
weighted average interest rate of 3.6%, and short-term bank credits of
$2.0 million, mostly denominated in euro, with a weighted average interest
rate of 3.3%.

36

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Long-term
bank borrowings include $4.0 million in euro with a weighted average
interest rate of 4.2%, $0.8 million in dollars with a weighted average
interest rate of 4.0%, and $1.7 million in NIS with a weighted average
interest rate of 4.25%.

In
addition, Shamir and Eyal have undertaken to maintain certain financial ratios
in Eyals financial statements with respect to Eyals loan from a bank in the
amount of $1.0 million at December 31, 2004. As of December 31, 2003
and December 31, 2004, Eyal was in compliance with this ratio.

Contractual
Obligations and Commercial Commitments

The
following table summarizes our contractual and commercial obligations and
commitments as of December 31, 2004:

| |                               |  |                   |        |      |   |       |  |      |       |      |   |                    |  |   |       |  |   |       | 
| | ----------------------------- |  | ----------------- | ------ | ---- | - | ----- |  | ---- | ----- | ---- | - | ------------------ |  | - | ----- |  | - | ----- | 
| |                               |  | Payments
  Due In |       
| |                               |  |                   |       
| | (Dollars in
  thousands)      |  | Total             |        | 2005 |   | 2006  |  | 2007 |       | 2008 |   | 2009 andThereafter | 
| |                               |  |                   |        |      |   |       |  |      |       |      |   |                    | 
| |                               |  |                   |        |      |   |       |  |      |       |      |   |                    |  |   |       |  |   |       | 
| | Contractual
  obligations:    |  |                   |        |      |   |       |  |      |       |      |   |                    |  |   |       |  |   |       | 
| | Long-term
debt                |  | $                 | 8,521  |      | $ | 3,857 |  | $    | 1,521 |      | $ | 1,700              |  | $ | 515   |  | $ | 928   | 
| | Operating lease obligations   |  |                   | 10,358 |      |   | 1,153 |  |      | 993   |      |   | 993                |  |   | 680   |  |   | 6,539 | 
| | Total contractual
obligations |  | $                 | 18,879 |      | $ | 5,010 |  | $    | 2,514 |      | $ | 2,693              |  | $ | 1,195 |  | $ | 7,467 | 

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 collectability is probable.

We have
various programs that allow opticians to earn rebates on their accumulated
purchases. These rebates are recognized as a reduction of revenues based on the
rebates earned and the estimated future payments in accordance with
EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendors Products). The cumulative liability for unredeemed
rebates is adjusted over time based on actual experience and trends with
respect to program compliance.

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.

37

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

Inventory Valuation

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

Impairment of
Long-lived Assets

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

Deferred Income
Taxes

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

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

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

Contingencies

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

38

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Recent Accounting Pronouncements

In
November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS No. 151
amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, to clarify that
abnormal amounts of idle facility expense, freight handling costs and wasted
materials (spoilage) should be recognized as current-period charges. In
addition, SFAS No. 151 requires that allocation of fixed production overheads
to the costs of conversion be based on normal capacity of the production
facilities. SFAS No. 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. We do not expect that the adoption
of SFAS No. 151 will have a material effect on its financial position or
results of operations.

On
December 16, 2004, the FASB issued Statement No. 123 (revised 2004),
Share-Based Payment (Statement 123R), which is a revision of FASB Statement
No. 123, Accounting for Stock-Based Compensation (Statement 123).  Generally, the approach in Statement 123R is
similar to the approach described in Statement 123. However, Statement 123 permitted,
but did not require, share-based payments to employees to be recognized based
on their fair values while Statement 123R requires all share-based payments to
employees to be recognized based on their fair values. Statement 123R also
revises, clarifies and expands guidance in several areas, including measuring
fair value, classifying an award as equity or as a liability and attributing
compensation cost to reporting periods. The new Standard will be effective for
us in the first fiscal year beginning after June 15, 2005. The adoption of
Statement 123R will have a significant effect on our results of operations.

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ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

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, Kibbutz Shamir, Upper Galilee, 12135 Israel. Other than Giora
Ben-Zeev and Rami Ben-Zeev, who are brothers, there are no family relationships
among members of our board or our executive officers.

|                        |  |     |  |                                                     
|----------------------- |  | --- |  | ----------------------------------------------------
|Name                    |  | Age |  | Position/Principal
  Occupation                     
|                        |  |     |  |                                                     
|Giora Ben-Zeev(1)(2)    |  | 62  |  | Director;
  President and Chief Executive Officer   
|Dan Katzman             |  | 50  |  | Chief
  Engineer, Vice President                    
|Dagan
  Avishai(1)(2)   |  | 45  |  | Executive
  Vice President, Vice President Marketing
|Amir Hai                |  | 39  |  | Chief
  Financial Officer                           
|Rami Ben-Zeev(1)(2)     |  | 56  |  | Vice
  President                                    
|Yair Shamir(3)          |  | 59  |  | Director and
  Chairman of the Board                
|Uzi Tzur(1)(4)          |  | 65  |  | Director                                            
|Efrat Cohen(2)          |  | 37  |  | Director                                            
|Orly
  Hayardeny Felner |  | 35  |  | Director                                            
|Ami Samuels(5)          |  | 46  |  | Director                                            
|Amos Netzer(5)          |  | 49  |  | Director                                            
|Zeev Feldman(3)         |  | 53  |  | Director                                            
|Jed Arkin(3)            |  | 41  |  | Director                                            

|    |                                                      
|--- | -----------------------------------------------------
|   
|(1) | Member of
  Kibbutz Shamir.                          
|    |                                                      
|(2) | Member of
  the management board of Kibbutz Shamir.  
|    |                                                      
|(3) | Independent
  board member.                          
|    |                                                      
|(4) | Chairman of
  the management board of Kibbutz Shamir.
|    |                                                      
|(5) | External and
  independent board member.             

In March 2005,
as part of our corporate reorganization in preparation for the initial public
offering of our shares, we also restructured our board of directors into its
current form and membership.  Prior to
this restructuring and as of December 31, 2004, the board of the A.C.S.
consisted of the following six members: Uzi Tzur (acting chairman), Giora
Ben-Zeev, Efrat Cohen, Smadar Barber-Tsadik, Danny Sisso and Zeev Markman.  In January 2005 Smadar Barber-Tsadik
resigned and Orly Hayardeny Felner was appointed to the board.  Prior to the reorganization, Danny Sisso
resigned from the board.

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

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

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

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

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

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

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

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

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

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

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

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

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

Board of Directors

On
March 6, 2005, in preparation for the initial public offering of our
shares, we reorganized our company into an Israeli limited liability company.
See Item 3.  Key InformationCorporate
Reorganization. Upon the closing of the March 2005 offering, we became a public
company, as the term is defined under the Israeli Companies Law. As a limited
liability public company, we are managed by a single board of directors and by
our executive officers. Under the Israeli Companies Law and our articles of
association, the board of directors is responsible, among other things, for
establishing the companys policies and overseeing the performance and
activities of our chief executive officer, convening shareholders meetings,
preparing and approving our financial statements, reviewing and approving
fundamental strategic, financial and organizational decisions on behalf of the
company, and issuing securities and distributing dividends. The board also
appoints and may remove the chief executive officer of the company.

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

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

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

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

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

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

In
compliance with the Israeli Companies Law, our articles of association include
a provision authorizing us to undertake, in advance, to indemnify an office
holder, provided that the undertaking is limited to types of events and to an
amount that the board of directors deems to be reasonable under the
circumstances. Our articles also contain a provision authorizing us to
retroactively indemnify an office holder.

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 intend to provide 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 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
Companies Law provides for an initial three-year term for an external director,
which may be extended for one additional three-year term. External directors
may be removed only by the same special majority required for their election or
by a court, and then only if the external directors cease to meet the statutory
qualifications for their appointment or if they violate their duty of loyalty
to the company. In the event of a vacancy created by an external director, our
board of directors is required under the Companies Law to call a shareholders
meeting to appoint a new external director.

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

Board Practices

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

Audit Committee

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

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

Compensation
Committee

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

Nominating and
Governance Committee

The
nominating and governance committee is responsible for making recommendations
to the board of directors regarding candidates for directorships and the size
and composition of the board. In addition, the committee is responsible for
overseeing our corporate governance guidelines and reporting and making
recommendations to the board concerning corporate governance matters. The
members of the nominating and governance committee are Zeev Feldman as
chairman, Jed Arkin and Amos Netzer. The composition and functions of the
nominating and governance committee meet the requirements of the Nasdaq
National Market rules.

Internal Auditor

Under
the Israeli Companies Law, the board of directors of a public company must
appoint an internal auditor nominated by the 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 office holder, or a relative of
any interested party or office holder, and may not be a member of the companys
independent accounting firm or its representative. The Companies Law defines an
interested party as a holder of 5% or more of the shares or voting rights of a
company, any person or entity that has the right to nominate or appoint at
least one director or the general manager of the company or any person who
serves as a director or as the general manager of a company. We appointed an
internal auditor in June 2005.

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Compensation of Directors and Management

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

In
August 2004 we paid a retirement grant in the amount of $165,000 to the
chairman of our board, who has since retired. We pay compensation to our
external directors in accordance with the range provided by the Israeli
Companies Law for compensation of external directors. Since the closing of the
March 2005 initial public offering of our shares, we pay our directors, with
the exception of the chairman of our board of directors and our chief executive
officer, compensation of $1,500 per meeting attended (or $300 per meeting
attended by telephone). Our board of directors has approved in principle the
plan to issue each of our directors, other than our chairman and our chief
executive officer, options to purchase 23,540 of our common shares. Pursuant to
the Israeli Companies Law, such allotment is subject to the formal approval of
the Audit Committee, board of directors and shareholders meeting, with which we
intend to comply in the near future. We do not plan to pay any compensation to
our chief executive officer for his service as a director. We have entered into
an agreement with the chairman of our board of directors, Yair Shamir,
according to which we will pay him $6,000 per month for his services as
chairman of the board. Pursuant to the agreement, we also agreed to grant
Mr. Shamir options to purchase our common shares, as described below.

The
aggregate direct compensation we paid to our officers as a group (five
persons), either directly or through Kibbutz Shamir as part of our working
services agreement with Kibbutz Shamir (see Item 7.  Major Shareholders and Related Party Transactions) for the year
ended December 31, 2004 was $0.8 million, including amounts set aside
or accrued to provide for pension, retirement or similar benefits. This amount
does not include expenses we incurred for other payments, including dues for
professional and business associations, business travel and other expenses, and
other benefits commonly reimbursed or paid by companies in Israel. We have also
granted options to purchase our common shares to our officers as part of their
overall compensation. See Employee Share Ownership. We did not pay our
directors any compensation during 2004 other than reimbursement of costs for
attending our board meetings.

As
of the date of this annual report, there were outstanding options to purchase
964,100 common shares granted to our directors and officers (five persons,
including the chairman of our board of directors), at exercise prices ranging
from less than $0.01 to $12.43. See Employee Share Ownership for a
description of the options granted to our officers. These shares may be
purchased at a weighted average exercise price of $7.53 and would have an
aggregate market price of approximately $13.5 million, based on the initial
public offering price of $14.00 per share.

The
options described in the preceding paragraph include options to purchase
160,961 of our common shares which we agreed in January 2005 to grant to
the then nominee for chairman of our board of directors, Yair Shamir. The grant
date for these options will be one year following our initial listing on a U.S.
stock exchange, which occurred on March 11, 2005. The exercise price for these
options will be $12.11 per share, and the options will be exercisable until
August 24, 2011. The options will vest in twelve approximated equal
parts on a quarterly basis over the course of the three years following the
grant date. For accounting purposes, we treat these options as granted as of
the date of our agreement with Yair Shamir.

Loans Extended and Guarantees Provided

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

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Employees

As
of December 31, 2004, we had a workforce consisting of 610 people, which
includes 571 employees and 39 persons who provide services to us
through our working services agreement with Kibbutz Shamir (see Item 7.  Major Shareholders and Related Party
Transactions). The following table shows the breakdown of our workforce by
main category of activity and geographic location as of December 31 for
the past three years.

| |                                 |  |      |     |      |  |      |  |  |     | 
| | ------------------------------- |  | ---- | --- | ---- |  | ---- |  |  | --- | 
| | Department or location          |  | 2002 |     | 2003 |  | 2004 | 
| |                                 |  |      |     |      |  |      | 
| | Research and
  development      |  |      | 33  |      |  | 34   |  |  | 40  | 
| | Marketing
  and sales           |  |      | 37  |      |  | 49   |  |  | 66  | 
| | Management
  and administration |  |      | 62  |      |  | 71   |  |  | 96  | 
| | Manufacturing
  and warehouse   |  |      | 288 |      |  | 354  |  |  | 408 | 
| | Total                           |  |      | 420 |      |  | 508  |  |  | 610 | 
| |                                 |  |      |     |      |  |      |  |  |     | 
| | Israel                          |  |      | 292 |      |  | 344  |  |  | 332 | 
| | United
  States                 |  |      | 18  |      |  | 30   |  |  | 47  | 
| | Europe                          |  |      | 110 |      |  | 134  |  |  | 231 | 
| | Total                           |  |      | 420 |      |  | 508  |  |  | 610 | 

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.

Employee Share Ownership

As
of the date of this annual report, none of our directors or officers directly
hold any of our shares.  Our chairman
and CEO and other certain officers, other than directors, hold options to
purchase 964,100 of our common shares. Our board of directors has approved in
principle the plan to issue to our directors 25,250 options each (except for
the chairman of our board, Yair Shamir, and our CEO, Giora Ben-Zeev). Pursuant
to Israeli Company Law, such allotment is subject to the formal approval of the
Audit Committee, board of directors and shareholders meeting, with which we
intend to comply in the near future. As described below, these options are held
by Giora Ben-Zeev, Amir Hai, Dagan Avishai and Dan Katzman, as well as the
chairman of our board of directors, Yair Shamir.  For a description of the options held by our directors, please
see Compensation of Directors and Management.

On
August 24, 2004 our board of directors granted options to purchase 683,120
of our shares to certain of our executive officers and other employees. Out of
these options, the board granted options to purchase up to 301,376 of our
shares to our chief executive officer, Giora Ben-Zeev, and options to purchase
up to 66,973 of our shares to each of our chief financial officer, Amir Hai,
and our executive vice president, Dagan Avishai. The exercise price for these
options was set at $10.30 per share. Also out of these options, the board
granted options to purchase a total of up to 214,312 of our shares to certain
employees in research and development and options to purchase up to 33,486 of
our shares to certain development managers. The exercise price for these
options is $12.43. The 33,486 options for development managers were granted to
Dan Katzman. The board authorized our chief executive officer to finally
determine the allocation of the options among the development employees.
Furthermore, the board approved options to purchase an additional 288,360 of
our shares for future grants to directors or employees. On January 1,
2005, we agreed to grant 160,961 out of these 288,360 additional options to
Yair Shamir (see Compensation of Directors and Management), leaving 127,399
additional options for future grants to directors or employees.

The
options described in the immediately preceding paragraph (including the 127,399
additional options for future grants) are exercisable until August 24,
2011. Except for the options granted to Yair Shamir (whose vesting period is
described in Compensation of Directors and Management), options will vest in
four tranches of 25% per year, beginning on the first anniversary of the March
2005 offering. 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.

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

In
2000 our board of directors granted options to purchase 120,480 of our shares
to Michael Latzer, the president of Shamir USA. The exercise price of these
options is $9.96 per share. The options are exercisable until December 31,
2008 and are currently fully vested. We understand that Mr. Latzer has
transferred these options to a family member.

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ITEM 7.  MAJOR SHAREHOLDERS AND
RELATED PARTY TRANSACTIONS

Major
Shareholders

The
following table and footnotes set forth information, as of June 15, 2005,
regarding the beneficial ownership of our common shares by:

| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | each person
  or entity that we know beneficially owns more than 5% of our outstanding
  common shares; and
| |   |                                                                                                            
| |  | each of our
  directors or executive officers who beneficially owns any of our shares.                     

Beneficial
ownership of shares is determined in accordance with the rules of the SEC and
generally includes any shares over which a person exercises sole or shared
voting or investment power. Common shares that are subject to warrants or stock
options that are presently exercisable or exercisable within 60 days of
the date of the March 2005 offering are deemed to be outstanding and
beneficially owned by the person holding the warrants or stock options for the
purpose of computing the percentage ownership of that person, but are not
treated as outstanding for the purpose of computing the percentage of any other
person.

Our
pre-IPO shareholders have entered into a shareholder agreement that governs
certain of their rights and obligations toward one another. This agreement is
described below.

Except
as indicated in the footnotes to this table, each shareholder in the table has
sole voting and investment power for the shares shown as beneficially owned by
them. All of our shareholders have the same voting rights. Percentage ownership
is based on 16,111,332 common shares outstanding following the closing of our
March 2005 initial public offering of our common shares. Except as otherwise
disclosed, the address of Kibbutz Shamir and of Dan Katzman is c/o Shamir
Optical Industry, Kibbutz Shamir, Upper Galilee, 12135 Israel. FIBIs
address is FIBI Investment House Ltd., 17th Floor, Africa
Israel Building, 14 Ehad Ha-Am Street, Tel Aviv, Israel.

| |                                 |  |                     |  |                    |   |  |  |  |           |  | 
| | ------------------------------- |  | ------------------- |  | ------------------ | - |  |  |  | --------- |  | 
| | Name of Beneficial Owner        |  | Percent of
  Shares |  | Number of
  Shares |  
| |                                 |  |                     |  |                    |  
| | Kibbutz
  Shamir(1)             |  |                     |  | 58.07              | % |  |  |  | 9,355,208 |  | 
| | FIBI
  Investment House Ltd.(2) |  |                     |  | 6.60               | % |  |  |  | 1,063,151 |  | 
| | Dan Katzman(3)                  |  |                     |  | 2.23               | % |  |  |  | 367,817   |  | 
| | Public Float                    |  |                     |  | 28.55              | % |  |  |  | 4,600,000 |  | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Kibbutz
  Shamir holds shares in our company through Shamir Optica Holdings
  A.C.S. Ltd. The management board of Kibbutz Shamir manages the economic
  activities and strategy of Kibbutz Shamir and makes the voting and investment
  decisions of Kibbutz Shamir (by majority vote) with regard to our shares. The
  management board of Kibbutz Shamir has 16 members. Giora Ben-Zeev, Efrat
  Cohen, Dagan Avishai, Rami Ben-Zeev and Uzi Tzur are directors or officers of
  our company and also members of the management board of Kibbutz Shamir, and our
  shares held by Kibbutz Shamir may be attributed to them. The other members of
  the management board of Kibbutz Shamir are Edy Kudlash, Nili Ven Der Veen,
  Yitzchak Cahana, Avraham Hadar, Zeev Markman, Ilan Pickman, Pinchas Carmi,
  Yossi Michaeli, Jacon Gotlib, Maya Segal and Omry Rotem.                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(2) | The voting
  and investment decisions for FIBI Investment House are made by the chief
  executive officer of FIBI Investment House. The chief executive officer may
  also request the approval of the board of FIBI Investment House with regard
  to unusually important votes. In case of a disposition of all or
  substantially all of our shares by FIBI Investment House, a decision
  regarding this disposition will be taken by the board of directors of FIBI
  Holdings Ltd., the parent company of FIBI Investment House. The chief
  executive officer of FIBI Investment House is Guy Vaadia. The members of the
  board of directors of FIBI Investment House are Zadik Bino, Gil Bino and
  Garry Stock. The members of the board of directors of FIBI Holdings Ltd.
  are Zadik Bino, Gil Bino, Garry Stock, Harry (Hersh) Cooper, Yossef Alchech,
  Gabriel Roter, Nilli Even-Chen, Mordechai Ben Shach and Gabi Barbash.

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

As
of the date of this annual report, there were outstanding options to purchase
964,100 common shares, or 6.0% of our total outstanding shares, to our
directors and officers at a weighted average exercise price of $7.53 per share.

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

Certain Relationships and Related Party
Transactions

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

Relationship with
Kibbutz Shamir

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

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

The
economic activities and strategy of Kibbutz Shamir are managed by an elected
management board. This board is the key economic decision-making body of
Kibbutz Shamir. Its members are elected by the members of the council of
Kibbutz Shamir for terms of three years. The chairman of the management board
is elected for a term of four years directly by the members of Kibbutz Shamir.
Kibbutz Shamirs council is elected annually by the Kibbutz Shamir members. The
council may remove a member of the management board by simple majority vote.
The boards of directors of Kibbutz Shamirs companies operate independently
from the management board of Kibbutz Shamir itself. One of the members of our
companys board of directors, Uzi Tzur, is also the chairman of the management
board of Kibbutz Shamir and a member of Kibbutz Shamir. Our board member and
chief executive officer, Giora Ben-Zeev, and two of our companys executive
officers, Dagan Avishai and Rami Ben Zeev, are also members Kibbutz Shamir and
of the management board of Kibbutz Shamir. Another one of our directors, Efrat
Cohen, is a member of the management board of Kibbutz Shamir but not a member
of Kibbutz Shamir itself. About 40 members of our 344-person workforce in
Israel are also members of Kibbutz Shamir. Our headquarters and main production
facilities, which we lease from Kibbutz Shamir, are located on the premises of
Kibbutz Shamir, and we have entered into several professional agreements with
Kibbutz Shamir that are described below. While these agreements have been
negotiated on an arms length basis, they may contain terms that are different
from the terms that would have been included had these agreements been
negotiated with unaffiliated third parties.

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Working Services
Agreement with Kibbutz Shamir

On
January 5, 1999 we signed a working services agreement with Kibbutz
Shamir, our majority shareholder, pursuant to which Kibbutz Shamir supplies us,
at our request, with labor services staffed by kibbutz members.

Kibbutz
Shamir agreed to staff up to 59 positions upon demand, including up to one
managing director, up to six vice presidents, up to eight persons for senior
management or development positions, up to nine heads of departments, up to 12
professional workers, up to 10 other permanent workers and up to 13 positions
for temporary workers and short term assistance. A position is defined as
186 hours of work per month to be provided by members of Kibbutz Shamir.

In
return for the services, we pay to Kibbutz Shamir monthly fees set forth in the
agreement for each position filled by a kibbutz member. The fees are linked to
the consumer price index and are to be reviewed every two-and-a-half years. The
amount of the fee payment is calculated based on the number of positions
actually supplied to us during the preceding month. We are not responsible for
paying any other work-related expenses, other than the monthly fees (and any
applicable company-wide bonuses), for Kibbutz Shamir members who fill positions
with us. Other benefits are provided directly by Kibbutz Shamir.

We
may, in our sole discretion, refuse to accept workers referred to us by Kibbutz
Shamir or demand the replacement of existing workers for reasonable cause.
Similarly, Kibbutz Shamir may replace any worker with proper notice, provided
that his or her replacement possesses similar skills and experience. The
replacement of the general manager or any vice president requires 90 days
notice. Kibbutz Shamir has a right of first refusal to provide additional
services that we may require, and we shall not unreasonably refuse such
provision of services by kibbutz members.

In
2004 we paid a total of $1.6 million to Kibbutz Shamir under the working
services agreement.

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

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

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

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

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

Service Agreement
with Kibbutz Shamir

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

Kibbutz
Shamir has a right of first refusal to supply any additional services of this
type that we may require. In the event that we have not received an offer for
these services from a third party, the consideration for the additional
services is determined by an external, neutral appraiser and is subject to the
approval of our audit committee.

In
2004 we paid a total of $246,000 to Kibbutz Shamir under the service agreement.

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

The
services to be provided by Kibbutz Shamir pursuant to the new service agreement
include the same services as under the old agreement, except security services,
as well as internet access, use and maintenance of common outdoor areas, water
supply and other additional services.

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

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

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

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

Lease and Sublease
Agreements with Kibbutz Shamir

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

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

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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. Rental payments are $1 per month for each
square meter of yard and $4  per month for each square meter of building. At that time,
the Facilities included a building of approximately 3,238 square meters and a
yard of approximately 2,740 square meters. Kibbutz Shamir constructed an
additional 1,462 square meters of building at its own expense, for which we pay
rent of $6 per month 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.

In
2004 we paid a total of $294,000 to Kibbutz Shamir under the sublease
agreement.

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 property in the area. We
will continue to be entitled to provide Kibbutz Shamir with a 36-month written
termination notice after 10 years of lease.

Rental
payments under the amended agreement are the same as under the prior agreement,
except that the amended agreement specifies that any additional construction of
industrial facilities will be charged a rent of $4 per square meter, while
additional construction of offices will continue to 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.

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.

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Loan Agreements with
Kibbutz Shamir

In
accordance with our sublease agreement with Kibbutz Shamir dated
January 5, 1999 (which has since been amended), we granted a loan of
$370,000 to Kibbutz Shamir in several installments in 2004 in order to fund the
construction of an extension to our premises in Kibbutz Shamir. The loan is to
be repaid in quarterly equal 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.

We
intend to lend approximately $4 million to Kibbutz Shamir to finance the construction of a
new manufacturing facility, which we would then lease from the kibbutz. We would set off rental payments to the kibbutz against the loan
repayments the kibbutz owed us. This transaction will also require the approval of our
shareholders; we expect to submit the proposal for approval at a shareholders
meeting during the third quarter of 2005.

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

On
January 5, 1999 we signed an agreement, which was amended in
April 1999, with Kibbutz Shamir and F.I.B.I. Investment House Ltd.
(FIBI), an Israeli investment company, pursuant to which FIBI acquired
15 percent of our issued and outstanding share capital (in case we are
converted into a limited liability company and for purposes of dividend distributions)
in consideration for $4,147,050.

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

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

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

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

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

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.

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

53

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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 9.56% of our
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-current shareholders. See Item 10.
Additional Information  Shares Eligible for Future Sale  Registration Rights
Agreement.

Relationship with Kibbutz Eyal

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

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

As
long as Kibbutz Eyal holds at least 3% of our shares, it has the right to
appoint a member of our board of directors, as well as a tag-along right to
join a sale of our shares by Kibbutz Shamir in certain circumstances. Kibbutz
Eyal has waived its right to appoint a member of our board of directors,
effective as of the closing of the March 2005 offering. Kibbutz Eyal currently
holds approximately 2.82% of our shares.

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

Relationship with Altras Former Chief Executive
Officer

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



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

54

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ITEM 8. FINANCIAL INFORMATION

Consolidated Statements and Other Financial
Information

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

Export Sales

In
2004 substantially all of our products were produced in Israel, and we
generated almost all of our revenue outside of Israel.

Legal Proceedings

From
time to time, we and our subsidiaries may be involved in lawsuits, claims,
investigations or other legal or arbitral proceedings that arise in the
ordinary course of our business. These proceedings may include general
commercial disputes and claims regarding intellectual property. We are
currently not involved in any material legal proceedings. We are involved in
two disputes concerning allegations of breach of third parties patents, as
described below.

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

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

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

Dividend Policy

We
declare dividends upon the recommendation of our board of directors. Our board
of directors may elect to pay out some or all of the dividend in either stock
or cash. Under the Israeli Companies Law, our ability to pay dividends is
limited by certain requirements. For a description of these restrictions, see
Item 10. Additional InformationShare
Capital.

We
have historically paid dividends from our annual profits. We were also party to
an investment agreement with one of our shareholders that required us to pay
dividends. In the fiscal years 2001 through 2004, we paid dividends of $2.8 million, $4.0 million, $4.3 million and $6.6 million, respectively.

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

Significant Changes

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

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ITEM 9. THE OFFER AND LISTING

Offer and Listing Details

The
table below shows the monthly high and low sales prices of our common shares on
the Nasdaq National Market since the listing of our shares on Nasdaq on March
11, 2005.

|                                  |  |      |   |       |  |                                  |  |   |       | 
|--------------------------------- |  | ---- | - | ----- |  | -------------------------------- |  | - | ----- | 
|Month                             |  | High |   | Low   |  | Average
  Daily Trading
  Volume | 
|                                  |  |      |   |       |  |                                  | 
|                                  |  |      |   |       |  |                                  |  |   |       | 
|March 2005
  (beginning March 11) |  |      | $ | 19.49 |  |                                  |  | $ | 15.01 | 
|April 2005                        |  |      | $ | 17.15 |  |                                  |  | $ | 14.00 | 
|May 2005                          |  |      | $ | 17.98 |  |                                  |  | $ | 16.12 | 
|June 2005
  (until June 15)       |  |      | $ | 18.65 |  |                                  |  | $ | 16.00 | 

The
table below shows the monthly high and low sales prices of our common shares on
the Tel Aviv Stock Exchange since the listing of our shares on the Tel Aviv
Stock Exchange on May 2, 2005.

|                             |  |      |           |     |  |                                |  |  |        | 
|---------------------------- |  | ---- | --------- | --- |  | ------------------------------ |  |  | ------ | 
|Month                        |  | High |           | Low |  | Average Daily Trading
  Volume | 
|                             |  |      |           |     |  |                                | 
|                            
|May 2005
  (beginning May 2) |  |      | NIS 85.00 |     |  | NIS 69.30                      |  |  | 27,519 | 
|June 2005
  (until June 15)  |  |      | NIS 79.95 |     |  | NIS 72.85                      |  |  | 5,485  | 

Plan of Distribution

Not
applicable.

Markets

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

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ITEM 10. ADDITIONAL INFORMATION

Share Capital

As
of the date of this annual report, our authorized share capital consists of one
class of shares, which are our common shares. Out of our authorized share
capital of 100,000,000 common shares, par value NIS 0.01 per common share,
16,111,332 common shares are currently outstanding (since the completion of the
March 2005 offering).

All
of our issued and outstanding common shares are duly authorized, validly issued
and fully paid. Our common shares do not have preemptive rights. During the
year ended December 31, 2004, no
options to purchase common shares were exercised. Our articles of association
and the laws of the State of Israel do not restrict the ownership or voting of
common shares by non-residents of Israel, except for certain restrictions by
law with respect to ownership by nationals of some countries that are, or have
been, in a state of war with Israel.

Transfer of Shares and Notices

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

Anti-Takeover Provisions; Mergers and
Acquisitions Under Israeli Law

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

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 common shares out of our retained
earnings or our earnings derived over the two most recent years, whichever is
higher, as reflected in the last audited or reviewed financial report for a
period ending less than six months prior to distribution (the Profit
Requirement), provided that there is no reasonable concern that a payment of a
dividend will prevent us from satisfying our existing and foreseeable
obligations as they become due. If we do not meet the Profit Requirement, a
court may allow us to distribute a dividend, as long as the court is convinced
that there is no reasonable concern that a distribution might prevent us from
being able to meet our existing and anticipated obligations as they become due.
Dividends are distributed to shareholders in proportion to the nominal value of
their respective holdings.

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

Tax Law

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

Modification of Class Rights

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

Election of Directors

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

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Voting, Shareholders Meetings and
Resolutions

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

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

The
quorum required for any general meeting of shareholders consists of at least
two shareholders present in person or by proxy who hold or represent between
them at least 33 1/3% of
the voting rights. A meeting adjourned for lack of a quorum generally is
adjourned to the same day in the following week at the same time and place or
to a later date specified in the summons or notice of the meeting. At the
reconvened meeting, the required quorum consists of any number of shareholders
present. In any shareholders meeting, a shareholder can vote either in person
or by proxy. General meetings of shareholders will be held in Israel, unless
decided otherwise by our board.

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

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

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

Transfer Agent and Registrar

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

Israeli Securities Law Requirements

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

Listing

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

Shares Eligible for Future Sale

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

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Sale of Restricted
Shares

We
currently have 16,111,332 common shares outstanding, which consists of
12,711,332 common shares outstanding immediately following our reorganization into a limited liability
company on March 6, 2005 and 3,400,000 common shares that were newly issued as
part of the subsequent initial public offering of our shares, as well as no
exercise of share options. The 4,600,000 common shares sold in the March 2005
offering are freely tradable without restriction or further registration under
the Securities Act. However, if shares are purchased by affiliates, as that
term is defined in Rule 144 under the Securities Act, their sales of
common shares would be subject to volume limitations and other restrictions
that are described below.

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

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

|                               |  |                                                                                                                                                                                                                                                                   
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Approximate
  Number of Shares |  | Description                                                                                                                                                                                                                                                       
|                               |  |                                                                                                                                                                                                                                                                   
|4,600,000                      |  | Freely
  tradeable shares sold in the March 2005 offering.                                                                                                                                                                                                        
|11,511,332                     |  | In addition,
  after 180 days from the date of our initial public offering, except as
  otherwise discussed below, the lock-up period will expire, and these common
  shares will be saleable under Rule 144, subject to holding periods and volume
  limitations.

Lock-up Agreements

Each
of our directors and executive officers who hold shares or currently
exercisable options and those of our shareholders who held shares in our
company before the March 2005 initial public offering, all of whom currently
collectively hold an aggregate of 11,511,332 common shares, have agreed that
they will not sell any common shares owned by them without the prior written
consent of William Blair & Co., the lead underwriting bank in our
initial public offering, for a period of 180 days from the date of our
initial public offering (other than the shares they sold in the offering). We
have agreed to allow certain transfers of common shares subject to a lock-up
agreement to take place during the lock-up period, provided that the transferee
in each case agrees to be bound by a similar lock-up agreement. The 180-day
lock-up period will be extended if (1) we issue an earnings release during
the last 17 days of the lock-up period, or (2) prior to the
expiration of the lock-up period, we announce that we will release earnings
results during the 16-day period beginning on the last day of the lock-up
period. In either case, the lock-up period will be extended for 18 days
after the date of the earnings release. To the extent shares are released
before the expiration of the lockup period and these shares are sold into the
market, the market price of our common shares could decline. Immediately
following the 180-day lockup period, common shares outstanding after the March
2005 offering will become available for sale, subject to compliance with
Rule 144 and Rule 701, if applicable.

Registration Rights
Agreement

On
February 9, 2005 we entered into a registration rights agreement with our
shareholders at that time, according to which these shareholders, who held a
total of 12,711,332 shares prior to the offering and currently hold a total of
11,511,332 shares, have the right, subject to some limited conditions, to
demand that we file a registration statement on their behalf to register
their shares under the U.S. Securities Act of 1933. Each of the shareholders
has the right to make two such demands, with the exception of Vision Capital
LLC, which has the right to make one such demand. According to the agreement,
we will bear the registration fees, filing fees and certain other costs
incurred in connection with the registration resulting from the first of these
demands by each shareholder, while the shareholders will bear the costs
resulting from a second such demand. Under the agreement, the shareholders also
have the right to demand that we include their shares in a registration
statement that we file on our behalf or on behalf of other shareholders. These
rights become effective six months after the effective date of our first registration
statement and will terminate either six years after the date of the agreement
or, with respect to any shareholder, at such a time when 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.

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Taxation

United States
Taxation

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | you are the
  beneficial owner of shares;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | you are
  either (i) an individual resident or citizen of the United States,
  (ii) a corporation or other entity treated as a corporation for U.S.
  federal income tax purposes created in or organized under the laws of the
  United States or any state thereof, (iii) an estate whose income is
  subject to U.S. federal income taxation regardless of its source, or
  (iv) a trust if a U.S. court can exercise primary supervision over the
  administration of the trust and one or more U.S. persons are authorized to
  control all substantial decisions of the trust;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | you own our
  shares as capital assets;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | you own
  directly or indirectly less than 10% of our outstanding voting stock;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | you are
  fully eligible for benefits under the Limitation on Benefits article of the
  Income Tax Treaty between the United States of America and the State of
  Israel, signed 20 November 1975 (the Treaty); and                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | you are not
  also a resident of Israel for Israeli tax purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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

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

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

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

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

Dividends

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

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

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

If
a U.S. holder is an accrual method taxpayer, for taxable years beginning before
2005, it 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. However, for taxable years
beginning after 2004, 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).

Recently
enacted amendments to the Code generally have reduced the rates of tax payable
by individuals (as well as certain trusts and estates) on many items of income.
Regarding dividends, qualified dividend income received by individuals in
taxable years beginning on or before December 31, 2008 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, 2008, 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, 2004. However, this conclusion is a factual determination
that must be made annually and thus may be subject to change. A non-U.S. corporation will be classified as
a PFIC for any taxable year if at least 75% of its gross income consists of
passive income (such as dividends, interest, rents, royalties, or gains on the
disposition of certain minority interests), or at least 50% of the average
value of its assets consists of assets that produce, or are held for the
production of, passive income, taking into account a proportionate share of the
income and assets of corporations at least 25% owned by such corporation. If we
were characterized as a PFIC for any taxable year, you could suffer adverse tax
consequences. These consequences may include having gains realized on the disposition
of shares and certain dividends treated as ordinary income earned over your
holding period for the shares taxable at maximum rates applicable during the
years in which it is treated as earned and subject to punitive interest charges
for the deemed deferral benefit. Furthermore, dividends paid by a PFIC would
not be qualified dividend income as discussed above.

U.S. information reporting and
backup withholding

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

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

Israeli Taxation

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

Tax
Reform in Israel

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

General
Corporate Tax Structure

Israeli
companies are currently subject to tax at the rate of 34% 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, 32% in 2006 and 30% from
2007 onward. However, the effective tax rate payable by a company that derives
income from an approved enterprise may be considerably less, as further
discussed below.

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

The
Law for the Encouragement of Capital Investments, 1959, 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.

63

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

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

A
portion of our production facilities has been granted the status of Approved
Enterprises under three programs, the first of which was completed in 2001.
Income arising from our Approved Enterprise facilities is exempted from tax for
two years and entitled to reduced tax rates based on the level of foreign
ownership for a period of five to eight years. We have derived and expect to
continue to derive a certain portion of our income from our Approved Enterprise
facilities. Subject to compliance with applicable requirements, the current
benefits will continue until 2005 in respect of the second approved enterprise
and until 2007 with respect to the third approved enterprise program. Our
current investments in new facilities are in the process of approval, and we
cannot anticipate when the tax benefit period will commence. A portion of the
facilities of our subsidiary Eyal has also been granted the status of an
Approved Enterprise under the alternative package of benefits described above.

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

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

Tax Benefits for Research and
Development

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

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

According
to the Law for the Encouragement of Industry (Taxes), 1969, an industrial
company is a company resident in Israel, at least 90% of the income of which,
exclusive of income from defense loans, capital gains, interest and dividends,
is derived from an industrial enterprise owned by it. An industrial enterprise
is defined as an enterprise whose primary activity in a given tax year is
industrial production activity. We believe that we currently qualify as an
industrial company under this definition.

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

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | deduction of
  purchases of know-how and patents over an eight-year period for tax purposes;                                                   
| |   |                                                                                                                                                
| |  | the option
  to file a consolidated tax return with related Israeli industrial
  corporations that satisfy conditions described in the law; and
| |   |                                                                                                                                                
| |  | accelerated
  depreciation rates on equipment and buildings.                                                                                   

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

Special Provisions Relating to Taxation Under
Inflationary Conditions

The
Income Tax Law (Inflationary Adjustments), 1985 represents an attempt to
overcome the problems presented to a traditional tax system by an economy
undergoing inflation. The law is highly complex. Its features that are material
to us can be described as follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Under a
  special tax adjustment for the preservation of equity, corporate assets are
  classified broadly as either (a) fixed or inflation immune assets or
  (b) non-fixed or soft assets. If shareholders equity exceeds the
  depreciated cost of a companys fixed assets, the company may be entitled to
  a deduction of up to 70% in any tax year. The amount of the deduction is
  determined by multiplying this excess by the annual rate of inflation. If the
  depreciated cost of fixed assets exceeds a companys equity, then this excess
  is multiplied by the annual rate of inflation. The resulting amount is added
  to taxable income.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Subject to
  limitations described in the law, depreciation deductions on fixed assets and
  losses carried forward are adjusted for inflation based on the increase of
  the Israeli consumer price index.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Real gains,
  excluding inflationary gains, on traded securities held by companies that are
  not dealers in securities are taxable under the law, subject to the regular
  corporate tax rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | In 2001, new
  regulations were enacted regarding inflationary adjustments. Pursuant to
  these regulations, the minister of finance is entitled to suspend the
  application of the law of inflationary adjustment with respect to a tax year,
  if the inflation rate for that tax year was less than 3 percent in the
  previous year.                                                                                                                                                                                                                                                                                                                     

Capital Gains Tax Applicable to Resident and
Non-Resident Shareholders

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

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

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

Taxation of Non-Resident
Shareholders

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

Foreign Exchange Regulations

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

Dividends and Paying Agents

Not
applicable.

Statements by Experts

Not
applicable.

Documents on Display

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

Subsidiary Information

Not
applicable.

66

---

---



ITEM 11. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

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

Foreign Currency
Risk

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

Our
foreign currency exposures give rise to market risks associated with exchange
rate movements of the dollar, our functional and reporting currency, against
the euro and the NIS. In 2004 we generated approximately 36% of our revenues in
dollars and 60% in euros, and we incurred approximately 20% of our expenses in
NIS, 29% in dollars and 47% in euros.

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

As
of December 31, 2004, we had $13.4 million in current assets and
$21.2 million in current liabilities that are denominated in euros.
Additionally, we had $1.1 million in current assets and $2.8 in current
liabilities that are denominated in NIS.

Interest Rate Risk

We
believe that we are not exposed to a material interest rate risk due to the
fact that the majority of our liabilities are short-term liabilities.

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

67

---

---



PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES

As
of the date of this annual report, neither we nor any of our significant
subsidiaries are (i) in material default in the payment of principal or
interest related to any of our or their indebtedness or (ii) in any other
material default relating to our or their indebtedness where the amount of the
indebtedness exceeds 5.0% of our total assets on a consolidated basis. Neither
we nor any of our significant subsidiaries are in arrears or other material
delinquency relating to any outstanding stock.

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

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

We
received approximately $42.2 million in net proceeds from the sale by us of our
common shares in our initial public offering in March 2005. We did not receive
any of the proceeds from the sale of 600,000 common shares by the selling shareholders
or from the sale of 600,000 additional shares by the selling shareholders under
the over-allotment option.

We
have used approximately $2.2 million of the net proceeds from the offering for
early repayments of some of our outstanding indebtedness.

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

| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | approximately
  $8.0 million to build new production facilities in Shamir, Israel, which will
  focus mainly on the production of sophisticated plastic lenses using high index
  materials;
| |   |                                                                                                                                                                                             
| |  | approximately
  $4.0 to $5.0 million to expand our marketing and distribution network in the
  United States;                                                                               
| |   |                                                                                                                                                                                             
| |  | approximately
  $2.0 to $3.0 million to expand our research and development team and
  facilities to enable us to develop new and advanced products, technologies
  and materials;          
| |   |                                                                                                                                                                                             
| |  | to pay a
  dividend payable of $5.2 million;                                                                                                                                                
| |   |                                                                                                                                                                                             
| |  | to pursue
  possible acquisitions or strategic investments in laboratories in Europe and
  other complementary businesses, technologies or products;                                        
| |   |                                                                                                                                                                                             
| |  | to expand
  our marketing and distribution network in China and other parts of the world;
  and                                                                                             
| |   |                                                                                                                                                                                             
| |  | to fund
  working capital requirements and other general corporate purposes.                                                                                                                

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

68

---

---



As
of December 31, 2004, we had $3.1 million in current maturities of long-term
debt at the parent company level, consisting of twelve bank loans with interest
rates ranging from LIBOR plus 0.6% to LIBOR plus 1.5% and maturity dates
ranging from January 1, 2005 to September 1, 2008. Of this amount, $1.4 million
related to debt that we incurred in connection with our acquisition of
Cambridge Optical Group Limited in September 2004. As of June 15, 2005, we had
$0.1 million in current maturities of long-term debt at the parent company
level.

In
August 2004 we declared a dividend to our shareholders in a total amount of
$9.2 million in order to take advantage of certain tax benefits for our
shareholders. We paid $4.0 million of this dividend to our shareholders on
December 1, 2004. The remaining $5.2 million was recorded on the liabilities
side of our balance sheet following this payment as a dividend payable. This
dividend payable bears no interest and will be distributed to our shareholders
in equal monthly installments until December 31, 2005 using the proceeds from
the offering. This distribution will be made to our existing shareholders in
proportion to their shareholdings in our company at the time the dividend was
declared.

The
amount and timing of the expenditures listed above may vary depending upon a
number of factors, including, but not limited to, the amount of cash we
generate from our operations. Our plans for each of the potential uses of the
proceeds from the offering are currently at an early stage. We have not yet
defined the precise actions, projects or procedures that will be necessary for
each potential use of these proceeds. Certain of these uses (such as for
acquisitions) will involve negotiations with third parties that will determine
the amounts allocated to that use, and the final amounts could vary widely,
depending on the results of the negotiations. As a result, we cannot currently
determine with certainty the amounts of proceeds that will be allocated for
each of the purposes stated above. While we have estimated the amounts we
expect to use for those purposes that we believe are capable of estimation,
approximately $17.5 million of the net proceeds is not yet allocated to a
specific purpose. Our management will have significant discretion in the use of
the net proceeds, particularly the unallocated funds, and you may disagree with
the way these funds are utilized. We may find it necessary or advisable to use
portions of the net proceeds for other purposes, and we may apply the balance
of the net proceeds in other ways than the ones listed above. Until we use the
proceeds of the offering for the above purposes, we intend to invest the funds
in short-term and medium-term investment grade, interest bearing securities.
See Item 5. Operating and Financial Review and ProspectsLiquidity and Capital
Resources for additional information regarding our sources and uses of
capital.

ITEM 15. CONTROLS AND PROCEDURES

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

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

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

ITEM 16B. CODE OF ETHICS

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

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND
SERVICES

Kost
Forer Gabbay & Kasierer, a member of Ernst & Young Global, has served
as our independent auditor for the fiscal years ended December 31, 2003 and
2004. Fees billed or expected to be billed by Kost Forer Gabbay & Kasierer
for professional services for each of the last two fiscal years were as
follows:

69

---

---



|                     |  |        |        |  |  |         | 
|-------------------- |  | ------ | ------ |  |  | ------- | 
|Audit Fees Shamir    |  |        | 2003   |  |  | 2004    | 
|                     |  |        |        |  |  |         | 
|                     |  | (in $) |       
|Audit fees           |  |        | 68,119 |  |  | 395,000 | 
|Audit-related
  fees |  |        |       |  |  | 10,000  | 
|Tax fees             |  |        | 10,000 |  |  | 30,500  | 
|Other fees           |  |        | 8,033  |  |  | 0       | 
|Total                |  |        | 86,152 |  |  | 435,500 | 

Audit
fees are the aggregate fees billed by Kost Forer Gabbay & Kasierer for
professional services in connection with the audit of our companys
consolidated annual financial statements, reviews of interim financial
statements, comfort letters and similar services. Audit-related fees are fees
billed by Kost Forer Gabbay & Kasierer for accounting advice on actual or
contemplated transactions, attestation regarding compliance with certain
agreements, employee benefit plan audits and other agreed-upon procedures. Tax
fees are fees for tax advice on actual or contemplated transactions,
expatriate employee tax services and transfer pricing studies.

We
expect to propose to our annual meeting to engage Kost Forer Gabbay &
Kasierer as our auditors for the fiscal year ending December 31, 2005.

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

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

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

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

Not
applicable.

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, 2003 and 2004, 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, 2002, 2003 and 2004                                   |  | F-3-F-4  
|Consolidated
  Statements of Income for the years ended December 31, 2002, 2003 and
  2004             |  | F-5      
|Statements
  of Changes in Shareholders Equity for the years ended December 31,
  2002, 2003 and 2004 |  | F-6      
|Consolidated
  Statements of Cash Flows for the years ended December 31, 2002, 2003 and
  2004         |  | F-7-F-9  
|Notes to
  Consolidated Financial Statements                                                           |  | F-10-F-32

ITEM 19. EXHIBITS

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

|                 |  |                                                                                                                                                                                      
|---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  Number |  | Description                                                                                                                                                                          
|                 |  |                                                                                                                                                                                      
|3.1              |  | Articles of
  Association of Shamir.*                                                                                                                                                
|5.1              |  | Opinion of
  M. Seligman & Co. as to the validity of the shares.*                                                                                                                    
|10.1             |  | Lease
  agreement between Kibbutz Eyal and Eyal Optical Industries (1995) Ltd.*                                                                                                      
|10.2             |  | Working
  services agreement between Shamir and Kibbutz Shamir.*                                                                                                                     
|10.3             |  | Service
  agreement between Shamir and Kibbutz Shamir.*                                                                                                                              
|10.4             |  | Lease
  agreement between Kibbutz Shamir and the Israel Lands Administration.*                                                                                                       
|10.5             |  | Sublease
  agreement between Shamir and Kibbutz Shamir, including amendment.*                                                                                                        
|10.6             |  | Loan
  agreement between Shamir and Kibbutz Shamir.*                                                                                                                                 
|10.7             |  | Shareholders
  agreement among the shareholders of Shamir.*                                                                                                                          
|10.8             |  | Registration
  rights agreement between Shamir and certain of its shareholders.*                                                                                                     
|11               |  | Code of
  Ethics of Shamir                                                                                                                                                           
|12.1             |  | Certification of the Chief Executive Officer pursuant to §302 of the
  Sarbanes-Oxley Act of 2002                                                                                    
|12.2             |  | Certification of the Chief Financial Officer pursuant to §302 of the
  Sarbanes-Oxley Act of 2002                                                                                    
|13               |  | Certification of the Chief Executive Officer and Chief Financial
  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
  906 of the Sarbanes-Oxley Act of 2002
|21               |  | Subsidiaries
  of Shamir.*                                                                                                                                                           

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

71

---

---



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:                         | Giora Ben-Zeev | 
| |                             |                | 
| | Chief Executive Officer     |               
| |                             |                | 
| | By:                         | Amir Hai       | 
| |                             |                | 
| | Chief Financial Officer     |               

Date: June 28, 2005

72

---

---

SHAMIR OPTICAL INDUSTRY LTD
AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2004

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         
|                                                          |             
|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- 33

---

---



(ERNST & YOUNG LOGO)

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

SHAMIR OPTICAL INDUSTRY LTD.

We have audited the accompanying consolidated
balance sheets of Shamir
Optical Industry Ltd (Shamir) and its subsidiaries (collectively the
Company) as of December 31, 2003 and 2004, and the related consolidated
statements of income and cash flows and statements of changes in shareholders
equity for each of the three years in the period ended December 31, 2004.
These financial statements are the responsibility of Shamirs management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Shamir and its subsidiaries as of December
31, 2003 and 2004, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2004,
in conformity with U.S generally accepted accounting principles.

|                 |                                 
|---------------- | --------------------------------
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|March 31, 2005   | 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, |       
|                                                                                                                              |  |                |       
|                                                                                                                              |  | 2003           |        | 2004 |  
|                                                                                                                              |  |                |        |      |  
|ASSETS                                                                                                                        |  |                |        |      |   |        | 
|                                                                                                                              |  |                |        |      |   |        | 
|CURRENT
  ASSETS:                                                                                                             |  |                |        |      |   |        | 
|Cash and
cash equivalents                                                                                                     |  | $              | 6,033  |      | $ | 6,235  | 
|Trade receivables (net of
allowance for
  doubtful accounts of $ 450 and $ 533 at December 31, 2003 and 2004,
  respectively) |  |                | 13,123 |      |   | 15,394 | 
|Other
receivables and prepaid expenses                                                                                        |  |                | 2,105  |      |   | 3,099  | 
|Inventory                                                                                                                     |  |                | 12,782 |      |   | 16,296 | 
|                                                                                                                              |  |                |        |      |   |        | 
|                                                                                                                              |  |                |        |      |   |        | 
|Total current assets                                                                                                          |  |                | 34,043 |      |   | 41,024 | 
|                                                                                                                              |  |                |        |      |   |        | 
|                                                                                                                              |  |                |        |      |   |        | 
|LONG-TERM
  INVESTMENTS:                                                                                                      |  |                |        |      |   |        | 
|Severance
pay fund                                                                                                            |  |                | 1,501  |      |   | 1,765  | 
|Investments in
affiliates                                                                                                     |  |                | 572    |      |   | 666    | 
|                                                                                                                              |  |                |        |      |   |        | 
|                                                                                                                              |  |                |        |      |   |        | 
|Total long-term investments                                                                                                   |  |                | 2,073  |      |   | 2,431  | 
|                                                                                                                              |  |                |        |      |   |        | 
|                                                                                                                              |  |                |        |      |   |        | 
|PROPERTY,
  PLANT AND EQUIPMENT, NET                                                                                          |  |                | 14,193 |      |   | 15,609 | 
|                                                                                                                              |  |                |        |      |   |        | 
|                                                                                                                              |  |                |        |      |   |        | 
|OTHER ASSETS                                                                                                                  |  |                | 579    |      |   | 2,294  | 
|                                                                                                                              |  |                |        |      |   |        | 
|                                                                                                                              |  |                |        |      |   |        | 
|GOODWILL                                                                                                                      |  |                | 2,034  |      |   | 3,986  | 
|                                                                                                                              |  |                |        |      |   |        | 
|                                                                                                                              |  |                |        |      |   |        | 
|Total assets                                                                                                                  |  | $              | 52,922 |      | $ | 65,344 | 
|                                                                                                                              |  |                |        |      |   |        | 

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, |       
|                                                                                                                                                                                                           |  |                |       
|                                                                                                                                                                                                           |  | 2003           |        | 2004 |  
|                                                                                                                                                                                                           |  |                |        |      |  
|LIABILITIES
AND SHAREHOLDERS EQUITY                                                                                                                                                                       |  |                |        |      |   |        |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|CURRENT LIABILITIES:                                                                                                                                                                                       |  |                |        |      |   |        |  
|Short-term
bank credit and loans                                                                                                                                                                           |  | $              | 8,426  |      | $ | 10,986 |  
|Current maturities of
long-term loans                                                                                                                                                                      |  |                | 3,784  |      |   | 3,857  |  
|Trade
payables                                                                                                                                                                                             |  |                | 3,456  |      |   | 4,624  |  
|Dividend
payable                                                                                                                                                                                           |  |                | -      |      |   | 5,201  |  
|Accrued
expenses and other liabilities                                                                                                                                                                     |  |                | 8,342  |      |   | 8,531  |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|Total current
  liabilities                                                                                                                                                                                |  |                | 24,008 |      |   | 33,199 |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|LONG-TERM
LIABILITIES:                                                                                                                                                                                     |  |                |        |      |   |        |  
|Long-term loans                                                                                                                                                                                            |  |                | 4,575  |      |   | 4,664  |  
|Accrued
severance pay                                                                                                                                                                                      |  |                | 1,754  |      |   | 2,049  |  
|Deferred income
taxes                                                                                                                                                                                      |  |                | -      |      |   | 432    |  
|Other
long-term liability                                                                                                                                                                                  |  |                | 1,359  |      |   | -      |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|Total long-term
  liabilities                                                                                                                                                                              |  |                | 7,688  |      |   | 7,145  |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|MINORITY
INTERESTS                                                                                                                                                                                         |  |                | 6,281  |      |   | 7,370  |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|COMMITMENTS AND CONTINGENT LIABILITIES
  (Note 10)                                                                                                                                                         |  |                |        |      |   |        |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|TEMPORARY
EQUITY:                                                                                                                                                                                          |  |                |        |      |   |        |  
|Issued and outstanding: No
shares at
  December 31, 2003 and 502,400 shares at December 31, 2004                                                                                                           |  |                | -      |      |   | 3,000  |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|SHAREHOLDERS
EQUITY:                                                                                                                                                                                      |  |                |        |      |   |        |  
|Share capital-                                                                                                                                                                                             |  |                |        |      |   |        |  
|Common
shares of NIS 0.01 par value:                                                                                                                                                                       |  |                |        |      |   |        |  
|Authorized: 12,047,971 shares
at December 31, 2003 and 12,711,332 shares at December 31, 2004; Issued and outstanding: 12,047,971 shares at December 31, 2003 and 12,208,932 shares at December 31,
  2004 |  |                | 29     |      |   | 29     |  
|Additional
paid-in capital                                                                                                                                                                                 |  |                | 6,823  |      |   | 10,053 |  
|Deferred stock
compensation                                                                                                                                                                                |  |                | -      |      |   | (844   | )
|Accumulated
other comprehensive income                                                                                                                                                                     |  |                | 921    |      |   | 1,236  |  
|Retained
earnings                                                                                                                                                                                          |  |                | 7,172  |      |   | 4,156  |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|Total shareholders
  equity                                                                                                                                                                               |  |                | 14,945 |      |   | 14,630 |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  
|Total liabilities
  and shareholders equity                                                                                                                                                               |  | $              | 52,922 |      | $ | 65,344 |  
|                                                                                                                                                                                                           |  |                |        |      |   |        |  

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, |       
|                                                          |                                                    |                           |       
|                                                          |                                                    | 2002                      |        | 2003 |   | 2004   |      
|                                                          |                                                    |                           |        |      |   |        |      
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Revenues,
  net                                           |                                                    | $                         | 48,738 |      | $ | 60,079 |       | $ | 71,269 |   
|Cost of
  revenues                                        |                                                    |                           | 24,318 |      |   | 29,955 |       |   | 33,414 |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Gross profit                                              |                                                    |                           | 24,420 |      |   | 30,124 |       |   | 37,855 |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Operating
  expenses:                                     |                                                    |                           |        |      |   |        |       |   |        |   
|Research and development costs                            |                                                    |                           | 1,594  |      |   | 1,988  |       |   | 1,842  |   
|Selling and
marketing expenses                            |                                                    |                           | 10,659 |      |   | 13,756 |       |   | 18,902 |   
|General and administrative expenses                       |                                                    |                           | 2,756  |      |   | 3,564  |       |   | 4,502  |   
|Stock based
compensation (*)                              |                                                    |                           | -      |      |   | 1,809  |       |   | 82     |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Total
  operating expenses                                |                                                    |                           | 15,009 |      |   | 21,117 |       |   | 25,328 |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Operating
  income                                        |                                                    |                           | 9,411  |      |   | 9,007  |       |   | 12,527 |   
|Financial
  expenses and other, net                       |                                                    |                           | 1,600  |      |   | 1,064  |       |   | 864    |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Income
  before taxes on income                           |                                                    |                           | 7,811  |      |   | 7,943  |       |   | 11,663 |   
|Taxes on
  income                                         |                                                    |                           | 979    |      |   | 1,095  |       |   | 1,549  |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Income after
  taxes on income                            |                                                    |                           | 6,832  |      |   | 6,848  |       |   | 10,114 |   
|Equity in
  losses of affiliates, net                     |                                                    |                           | (367   | )    |   | (47    | )     |   | (48    | ) 
|Minority
  interest in earnings of subsidiaries           |                                                    |                           | (244   | )    |   | (1,564 | )     |   | (1,254 | ) 
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Net income                                                |                                                    | $                         | 6,221  |      | $ | 5,237  |       | $ | 8,812  |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Pro forma data (unaudited):                               |                                                    |                           |        |      |   |        |       |   |        |   
|Pro forma - additional taxes on income                    |                                                    | $                         | 1,075  |      | $ | 1,187  |       | $ | 1,707  |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Pro forma net
income                                      |                                                    | $                         | 5,146  |      | $ | 4,050  |       | $ | 7,105  |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Net earnings
  per share:                                 |                                                    |                           |        |      |   |        |       |   |        |   
|Basic                                                     |                                                    | $                         | 0.52   |      | $ | 0.43   |       | $ | 0.70   |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Diluted                                                   |                                                    | $                         | 0.52   |      | $ | 0.43   |       | $ | 0.68   |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Pro forma
  net earnings per share (unaudited) (Note 2q): |                                                    |                           |        |      |   |        |       |   |        |   
|Basic                                                     |                                                    | $                         | 0.43   |      | $ | 0.34   |       | $ | 0.56   |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|Diluted                                                   |                                                    | $                         | 0.43   |      | $ | 0.33   |       | $ | 0.55   |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|(*)                                                       | Stock based
  compensation includes the following: |                           |        |      |   |        |       |   |        |   
|                                                          | Research and
  development costs                   |                           | $      | -    |   | $      | 1,809 |   | $      | - 
|                                                          | Selling and
  marketing expenses                   |                           |        | -    |   |        | -     |   |        | 13
|                                                          | General and
  administrative expenses              |                           |        | -    |   |        | -     |   |        | 69
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   
|                                                          |                                                    |                           | $      | -    |   | $      | 1,809 |   | $      | 82
|                                                          |                                                    |                           |        |      |   |        |       |   |        |   

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

F-5

---

---



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

|                                                                                |  | Numberof shares |            | Sharecapital |    | Additionalpaid-in
  capital |  | Deferredstock
  compensation |        | Accumulated
  other
  comprehensive
  income |   | Retainedearnings |   | Totalcomprehensive
  income |       | Totalshareholdersequity |  
|------------------------------------------------------------------------------- |  | --------------- | ---------- | ------------ | -- | --------------------------- |  | ---------------------------- | ------ | -------------------------------------------- | - | ---------------- | - | --------------------------- | ----- | ------------------------ | -
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Balance as of January 1, 2002                                                   |  |                 | 12,047,971 |              | $  | 29                          |  | $                            | 4,824  |                                              | $ | -                |   | $                           | (93   | )                        | $
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Distribution of earnings to the shareholders                                    |  |                 | -          |              |    | -                           |  |                              | -      |                                              |   | -                |   |                             | -     |                          |  
|Capitalization of retained earnings into additional paid-in
capital             |  |                 | -          |              |    | -                           |  |                              | 190    |                                              |   | -                |   |                             | -     |                          |  
|Comprehensive income:                                                           |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Foreign currency translation
adjustments                                        |  |                 | -          |              |    | -                           |  |                              | -      |                                              |   | -                |   |                             | 407   |                          |  
|Net income                                                                      |  |                 | -          |              |    | -                           |  |                              | -      |                                              |   | -                |   |                             | -     |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Total comprehensive income                                                      |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Balance as of December 31, 2002                                                 |  |                 | 12,047,971 |              |    | 29                          |  |                              | 5,014  |                                              |   | -                |   |                             | 314   |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Distribution of earnings to shareholders                                        |  |                 | -          |              |    | -                           |  |                              | -      |                                              |   | -                |   |                             | -     |                          |  
|Compensation related to grant of options to an employee                         |  |                 | -          |              |    | -                           |  |                              | 1,809  |                                              |   | -                |   |                             | -     |                          |  
|Comprehensive income:                                                           |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Foreign currency translation
adjustments                                        |  |                 | -          |              |    | -                           |  |                              | -      |                                              |   | -                |   |                             | 607   |                          |  
|Net income                                                                      |  |                 | -          |              |    | -                           |  |                              | -      |                                              |   | -                |   |                             | -     |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Total comprehensive income                                                      |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Balance as of December 31, 2003                                                 |  |                 | 12,047,971 |              |    | 29                          |  |                              | 6,823  |                                              |   | -                |   |                             | 921   |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Distribution of earnings to shareholders                                        |  |                 | -          |              |    | -                           |  |                              | -      |                                              |   | -                |   |                             | -     |                          |  
|Issuance of shares, net                                                         |  |                 | 160,961    |              | *) | -                           |  |                              | 1,945  |                                              |   | -                |   |                             | -     |                          |  
|Classification of liability into temporary equity and exercise of
call
  option |  |                 | 502,400    |              | *) | -                           |  |                              | 3,359  |                                              |   | -                |   |                             | -     |                          |  
|Reclassification of puttable shares into temporary
equity                       |  |                 | (502,400   | )            | *) | -                           |  |                              | (3,000 | )                                            |   | -                |   |                             | -     |                          |  
|Deferred stock compensation related to grant of options to
employees            |  |                 | -          |              |    | -                           |  |                              | 926    |                                              |   | (926             | ) |                             | -     |                          |  
|Amortization of deferred stock compensation                                     |  |                 | -          |              |    | -                           |  |                              | -      |                                              |   | 82               |   |                             | -     |                          |  
|Comprehensive income:                                                           |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Foreign currency translation adjustments                                        |  |                 | -          |              |    | -                           |  |                              | -      |                                              |   | -                |   |                             | 315   |                          |  
|Net income                                                                      |  |                 | -          |              |    | -                           |  |                              | -      |                                              |   | -                |   |                             | -     |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Total comprehensive income                                                      |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  
|Balance as of December 31, 2004                                                 |  |                 | 12,208,932 |              | $  | 29                          |  | $                            | 10,053 |                                              | $ | (844             | ) | $                           | 1,236 |                          | $
|                                                                                |  |                 |            |              |    |                             |  |                              |        |                                              |   |                  |   |                             |       |                          |  

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

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

F-6

---

---



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

|                                                                                             |  |                           |        |      |   |        |   |   |        |  
|-------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                             |  | Year ended
  December 31, |       
|                                                                                             |  |                           |       
|                                                                                             |  | 2002                      |        | 2003 |   | 2004   |  
|                                                                                             |  |                           |        |      |   |        |  
|                                                                                             |  |                           |        |      |   |        |  
|Cash flows from operating activities:                                                        |  |                           |        |      |   |        |   |   |        |  
|                                                                                             |  |                           |        |      |   |        |   |   |        |  
|Net income                                                                                   |  | $                         | 6,221  |      | $ | 5,237  |   | $ | 8,812  |  
|Adjustments required to reconcile net
  income to net cash provided by operating activities: |  |                           |        |      |   |        |   |   |        |  
|Depreciation and amortization                                                                |  |                           | 2,439  |      |   | 3,658  |   |   | 3,805  |  
|Stock based compensation                                                                     |  |                           | -      |      |   | 1,809  |   |   | 82     |  
|Accrued severance pay, net                                                                   |  |                           | (14    | )    |   | (48    | ) |   | 31     |  
|Currency fluctuations of long-term
loans                                                     |  |                           | 827    |      |   | 988    |   |   | 363    |  
|Deferred taxes, net                                                                          |  |                           | (34    | )    |   | (335   | ) |   | (11    | )
|Equity in losses of affiliates, net                                                          |  |                           | 367    |      |   | 47     |   |   | 48     |  
|Minority interest in earnings of
  subsidiaries                                              |  |                           | 244    |      |   | 1,564  |   |   | 1,254  |  
|Foreign currency translation gains                                                           |  |                           | (380   | )    |   | (1,821 | ) |   | (525   | )
|Decrease (increase) in trade receivables,
  net                                              |  |                           | (2,735 | )    |   | 1,971  |   |   | (62    | )
|Increase in other receivables and prepaid
  expenses                                         |  |                           | (20    | )    |   | (465   | ) |   | (319   | )
|Increase in inventory                                                                        |  |                           | (1,653 | )    |   | (350   | ) |   | (3,123 | )
|Increase (decrease) in trade payables                                                        |  |                           | 1,523  |      |   | (1,812 | ) |   | (1,399 | )
|Increase in accrued expenses and other
  liabilities                                         |  |                           | 1,703  |      |   | 1,040  |   |   | 4      |  
|Others                                                                                       |  |                           | 754    |      |   | -      |   |   | (63    | )
|                                                                                             |  |                           |        |      |   |        |   |   |        |  
|                                                                                             |  |                           |        |      |   |        |   |   |        |  
|Net cash provided by operating activities                                                    |  |                           | 9,242  |      |   | 11,483 |   |   | 8,897  |  
|                                                                                             |  |                           |        |      |   |        |   |   |        |  
|                                                                                             |  |                           |        |      |   |        |   |   |        |  
|Cash flows from investing activities:                                                        |  |                           |        |      |   |        |   |   |        |  
|                                                                                             |  |                           |        |      |   |        |   |   |        |  
|Loans granted to affiliates                                                                  |  |                           | (42    | )    |   | (52    | ) |   | (44    | )
|Repayment of loans by affiliates                                                             |  |                           | 60     |      |   | 129    |   |   | -      |  
|Investment in affiliates                                                                     |  |                           | -      |      |   | -      |   |   | (98    | )
|Acquisition of Eyal (a)                                                                      |  |                           | -      |      |   | -      |   |   | (49    | )
|Acquisition of Cambridge (b)                                                                 |  |                           | -      |      |   | -      |   |   | (2,710 | )
|Acquisition of Altra                                                                         |  |                           | (365   | )    |   | -      |   |   | -      |  
|Acquisition of Interoptic                                                                    |  |                           | -      |      |   | -      |   |   | 298    |  
|Purchase of property, plant and
equipment                                                    |  |                           | (4,317 | )    |   | (5,270 | ) |   | (3,545 | )
|Government participation in purchase of
  property, plant and equipment                      |  |                           | 638    |      |   | 143    |   |   | -      |  
|Proceeds from sale of property, plant and
  equipment                                        |  |                           | 10     |      |   | 84     |   |   | 136    |  
|Proceeds from sale of shares in Altra                                                        |  |                           | 502    |      |   | 761    |   |   | -      |  
|                                                                                             |  |                           |        |      |   |        |   |   |        |  
|                                                                                             |  |                           |        |      |   |        |   |   |        |  
|Net cash used in investing activities                                                        |  | $                         | (3,514 | )    | $ | (4,205 | ) | $ | (6,012 | )
|                                                                                             |  |                           |        |      |   |        |   |   |        |  

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, |       
|                                                                                           |  |                           |       
|                                                                                           |  | 2002                      |        | 2003 |   | 2004   |  
|                                                                                           |  |                           |        |      |   |        |  
|                                                                                           |  |                           |        |      |   |        |  
|Cash flows from financing activities:                                                      |  |                           |        |      |   |        |   |   |        |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|Distribution of earnings to
shareholders                                                   |  | $                         | (3,978 | )    | $ | (4,257 | ) | $ | (6,627 | )
|Short-term bank credit, net                                                                |  |                           | (663   | )    |   | 434    |   |   | 2,156  |  
|Proceeds from exercise of call option                                                      |  |                           | -      |      |   | -      |   |   | 2,000  |  
|Issuance of shares, net                                                                    |  |                           | -      |      |   | -      |   |   | 1,649  |  
|Receipt of long-term loans                                                                 |  |                           | 1,610  |      |   | 2,442  |   |   | 1,771  |  
|Repayment of long-term loans                                                               |  |                           | (2,709 | )    |   | (2,957 | ) |   | (3,648 | )
|Dividend paid to minority by a
subsidiary                                                  |  |                           | -      |      |   | -      |   |   | (94    | )
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|Net cash used in financing activities                                                      |  |                           | (5,740 | )    |   | (4,338 | ) |   | (2,793 | )
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|Effect of exchange rate differences on cash
  and cash equivalents                         |  |                           | 78     |      |   | 285    |   |   | 110    |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|Increase in cash and cash equivalents                                                      |  |                           | 66     |      |   | 3,225  |   |   | 202    |  
|Cash and cash equivalents at beginning of
  year                                           |  |                           | 2,742  |      |   | 2,808  |   |   | 6,033  |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|Cash and cash equivalents at end of year                                                   |  | $                         | 2,808  |      | $ | 6,033  |   | $ | 6,235  |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|Supplemental information and disclosures of
  non-cash investing and financing activities: |  |                           |        |      |   |        |   |   |        |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|Receivables in respect of sale of Altras
  shares                                         |  | $                         | 664    |      | $ | -      |   | $ | -      |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|Distribution of earnings not yet paid                                                      |  | $                         | -      |      | $ | -      |   | $ | 5,201  |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|Cash paid during the period for:                                                           |  |                           |        |      |   |        |   |   |        |  
|Interest                                                                                   |  | $                         | 532    |      | $ | 722    |   | $ | 895    |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  
|Income taxes                                                                               |  | $                         | 462    |      | $ | 1,856  |   | $ | 1,854  |  
|                                                                                           |  |                           |        |      |   |        |   |   |        |  

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, | 
|                                                                                 |  |                           | 
|                                                                                 |  | 2002                      |  | 2003 |   | 2004   |  
|                                                                                 |  |                           |  |      |   |        |  
|                                                                                 |  |                           |  |      |   |        |  
|(a)          Acquisition
  of Eyal:                                              |  |                           |  |      |   |        |   |   |       |  
|                                                                                 |  |                           |  |      |   |        |   |   |       |  
|Fair value of assets acquired and liabilities assumed
at the
  acquisition date: |  |                           |  |      |   |        |   |   |       |  
|                                                                                 |  |                           |  |      |   |        |   |   |       |  
|Working capital (excluding cash and cash
equivalents)                            |  |                           |  |      | $ | 128    |   | $ | 49    |  
|Goodwill                                                                         |  |                           |  |      |   | 1,696  |   |   | -     |  
|Other intangible assets                                                          |  |                           |  |      |   | 579    |   |   | -     |  
|Minority interest                                                                |  |                           |  |      |   | 2,767  |   |   | -     |  
|                                                                                 |  |                           |  |      |   |        |   |   |       |  
|                                                                                 |  |                           |  |      |   |        |   |   |       |  
|                                                                                 |  |                           |  |      |   | 5,170  |   |   | 49    |  
|Less - amounts acquired by assuming short-term bank
credit                       |  |                           |  |      |   | (2,330 | ) |   | -     |  
|Less - amounts acquired by assuming long-term
loans                              |  |                           |  |      |   | (1,481 | ) |   | -     |  
|Less - amounts acquired by issuance of combined put
and call option              |  |                           |  |      |   | (1,359 | ) |   | -     |  
|                                                                                 |  |                           |  |      |   |        |   |   |       |  
|                                                                                 |  |                           |  |      |   |        |   |   |       |  
|                                                                                 |  |                           |  |      | $ | -      |   | $ | 49    |  
|                                                                                 |  |                           |  |      |   |        |   |   |       |  
|(b)          Acquisition
  of Cambridge:                                         |  |                           |  |      |   |        |   |   |       |  
|                                                                                 |  |                           |  |      |   |        |   |   |       |  
|Fair value of assets acquired and liabilities assumed
at the
  acquisition date: |  |                           |  |      |   |        |   |   |       |  
|                                                                                 |  |                           |  |      |   |        |   |   |       |  
|Working capital (excluding cash and cash
equivalents)                            |  |                           |  |      |   |        |   | $ | 479   |  
|Long-term deferred tax assets                                                    |  |                           |  |      |   |        |   |   | 428   |  
|Property and equipment                                                           |  |                           |  |      |   |        |   |   | 279   |  
|Other intangible assets                                                          |  |                           |  |      |   |        |   |   | 888   |  
|Goodwill                                                                         |  |                           |  |      |   |        |   |   | 1,798 |  
|Long-term loans                                                                  |  |                           |  |      |   |        |   |   | (896  | )
|Long-term deferred tax liabilities                                               |  |                           |  |      |   |        |   |   | (266  | )
|                                                                                 |  |                           |  |      |   |        |   |   |       |  
|                                                                                 |  |                           |  |      |   |        |   |   |       |  
|                                                                                 |  |                           |  |      |   |        |   | $ | 2,710 |  
|                                                                                 |  |                           |  |      |   |        |   |   |       |  

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

F-9

---

---



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

|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL
|            |        
|            | a.      | General:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |         | Shamir
  Optical Industry Ltd (Shamir) was incorporated under the laws of the State
  of Israel in the early 1970s. Shamir and its subsidiaries (collectively -
  the Group) design, develop, manufacture and market optical progressive
  lenses and molds. The Groups products are marketed in the U.S through its
  U.S. subsidiaries, Shamir U.S.A. and Shamir Insight Inc. and in Europe
  through its German subsidiary Altra Trading GmbH.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |         | On March 16,
  2005, Shamir completed an Initial Public Offering (IPO) on the NASDAQ stock
  exchange and issued 3,400,000 Common shares of NIS 0.01 par value for a net
  consideration of approximately $ 42,200. On March 6, 2005, in connection
  with the IPO, the Company changed its structure from an Agricultural
  Cooperative Society (ACS) into an Israeli limited liability company. In
  connection with the tax status change, the Company is expected to recognize
  deferred tax liability in the amount of approximately $ 400.                                                                                                                                                                                                                                                                                                                                                                                                     
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |         | Most of the
  raw materials used in the manufacture of lenses, including the Companys
  products, are available from a limited number of suppliers. The Company
  purchases its raw materials from some of these suppliers. The loss of any one
  of these suppliers, or a significant decrease in the supply of glass blanks
  or monomers, would require the Company to obtain these raw materials
  elsewhere. If the Company is unable to obtain glass blanks or monomers from
  its suppliers (or alternative suppliers) at acceptable prices, the Company may
  realize lower margins and experience difficulty in meeting its customers
  requirements.                                                                                                                                                                                                                                                                                          
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |         | As for major
  customers data, see Note 15c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | b.      | Acquisition
  of Eyal Optical Industries (1998) Ltd. (Eyal):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |         | Up
  until the fourth quarter of 2003, Shamir held 51% of Eyal (an Israeli based
  company). Eyal is engaged in production processes for advanced plastic
  progressive lenses. The results of operations of Eyal were included in the
  Groups consolidated statements of income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |         | In
  the fourth quarter of 2003, Shamir entered into an agreement with Kibbutz
  Eyal to purchase an additional 47% of Eyals equity in an aggregate amount of
  $ 5,170, by assuming short-term bank credits in the amount of
  $ 2,330 and long-term loans in the amount of $ 1,481. In addition,
  Shamir issued to the seller a Call option (the Call option) to purchase
  502,400 shares of Shamir for a total exercise price of $ 2,000,
  exercisable through January 10, 2004. Shamir also wrote a Put option (the
  Put option) to the seller to sell the underlying shares (upon exercise of
  the Call option) back to Shamir for $ 3,000, from January 1, 2006
  through January 10, 2010, or on the occurrence of earlier events
  concerning the structure or legal decisions by Shamir. On March 16, 2005,
  upon the IPO, the Put option expired.                                                                                    
|            |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |         | The
  acquisition was accounted for by the purchase method and accordingly, the
  purchase price has been allocated according to the estimated fair value of
  the assets acquired and liabilities assumed of Eyal. The Call and Put options
  were recorded at their fair value as other long-term liability in accordance
  with Statement of Financial Accounting Standard Board (SFAS) No. 150,
  Accounting for Certain Financial Instruments with Characteristics of both
  Liabilities and Equity. The fair value of the combined Call and Put options
  was $ 1,359 and was considered as part of the purchase price. On
  January 4, 2004, Kibbutz Eyal exercised its option to purchase 502,400
  shares of Shamir for the amount of $ 2,000. Upon exercise of the Call option,
  as the related outstanding shares were redeemable for cash outside the
  control of Shamir, the Group recorded an amount of $ 3,000 as temporary
  equity.

F-10

---

---



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

|            |                 |                                                                                                                 
|----------- | --------------- | ----------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 | The following table summarizes the fair
  values of the assets acquired and the buyout of the minority interest:

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Acquired other intangible assets in the
  amount of $579 with definite lives are amortized using the straight-line
  method at annual weighted average rate of approximately 17%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | On May 3, 2004, the Group acquired the
  remaining 2% of Eyals shares for a consideration of $49.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | c. | Acquisition
  of Altra Trading GmbH (Altra):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | On September 25, 2001, Shamir entered
  into an agreement to acquire 100% of the shares of Altra, a German-based
  company, for consideration of $ 2,850. Altra and its subsidiaries are
  engaged in the marketing of lenses in Europe. The closing date was October 25,
  2001. The results of Altras operations have been included in Shamirs
  consolidated statements of income since the closing date. Shortly after the
  acquisition, Shamir entered into negotiations with Altras CEO to sell 49% of
  Altras shares. In 2001, Shamir transferred 6% of Altras shares to Altras
  CEO at the time for no consideration. The Group recorded compensation
  expenses relating to the shares transferred in an amount of $ 173 in
  2001. In 2002, Shamir and Altras CEO finalized the sale of 43% of Altras
  shares. Losses in respect of the shares sold amounted to $ 754 and were
  recorded in financial expenses and other, net in 2002.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | d. | 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 (approximately $ 2,700). Under the terms of the
  acquisition agreement (the agreement), contingent cash payments will be
  paid if certain financial performance criteria are met in respect of future
  earnings of Cambridge for the 12-month period ending February 28, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-11

---

---



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

|            |                 |                                                                                                                                                                                                                                                                                                                                                          
|----------- | --------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1:    | GENERAL (Cont.)
|            |                
|            |                 | The acquisition was accounted for by the
  purchase method and accordingly, the purchase price has been allocated to the
  estimated fair value of the assets acquired and liabilities assumed of
  Cambridge. The results of Cambridges operations have been included in the
  consolidated financial statements of the Group starting August 31, 2004.
|            |                 |                                                                                                                                                                                                                                                                                                                                                          
|            |                 | With the acquisition of Cambridge, the
  Group significantly expanded its customer base and its presence in
  Europe.                                                                                                                                                                                                                                    
|            |                 |                                                                                                                                                                                                                                                                                                                                                          
|            |                 | The following table summarizes the fair
  values of the assets acquired and liabilities assumed:                                                                                                                                                                                                                                                         

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

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

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

F-12

---

---



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

|            |                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- | --------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES                                                                                                              
|            |                                                                                                                                              
|            | The
  consolidated financial statements have been prepared according to United
  States Generally Accepted Accounting Principles (US GAAP).
|            |                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | a.                                                                                                                                            | Use
  of estimates:                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                                                               | The preparation of financial statements in
  conformity with generally accepted accounting principles requires management
  to make estimates and assumptions that affect the amounts reported in the
  financial statements and accompanying notes. Actual results could differ from
  those estimates.                                                                                                            
|            |                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | b.                                                                                                                                            | Financial
  statements in U.S. dollars:                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                                                               | The functional currency of Shamir and certain
  subsidiaries is the U.S. dollar (dollar), as the dollar is the primary
  currency of the economic environment in which Shamir and certain subsidiaries
  have operated and expect to continue to operate in the foreseeable future.
  The reporting currency of the Group is the dollar.                                                                          
|            |                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                                                               | Accordingly, monetary accounts maintained in
  currencies other than the dollar are remeasured into dollars in accordance
  with SFAS No. 52 Foreign Currency Translation. All transaction gains and
  losses of the remeasured monetary balance sheet items are reflected in the
  statement of income as financial income or expenses, as appropriate.                                                          
|            |                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                                                               | For those foreign subsidiaries whose functional
  currency has been determined to be their local currency, 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.
  Translation adjustments are recorded in accumulated other comprehensive
  income, a separate component of shareholders equity.
|            |                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | c.                                                                                                                                            | Principles of
  consolidation:                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                                                               | The consolidated financial statements include the
  accounts of Shamir and its wholly and majority owned subsidiaries.
  Intercompany transactions and balances including profit from intercompany
  sales not yet realized outside the Group, have been eliminated upon
  consolidation.                                                                                                                           
|            |                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | d.                                                                                                                                            | Cash equivalents:                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                                                               | Cash equivalents are short-term highly liquid
  investments that are readily convertible to cash with maturities of three
  months or less at the date acquired.                                                                                                                                                                                                                                                    

F-13

---

---



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

|            |                                         |                                                                                                                                                                                                                                                                                                        
|----------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | e.                                      | Inventories:                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                        
|            |                                         | Inventories are stated at the lower of cost or
  market value. Cost is determined as follows:                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                        
|            |                                         | Raw materials and work-in-progress - using the
  method of first in - first out.                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                        
|            |                                         | Finished products - recorded on the basis of
  direct manufacturing costs with the addition of allocable indirect
  manufacturing costs, using the method of first in - first out.                                                                                                                   
|            |                                         |                                                                                                                                                                                                                                                                                                        
|            |                                         | Inventory provisions are provided to cover risks
  arising from slow-moving items, excess inventories and discontinued products.
  Inventory provisions for the years ended December 31, 2002, 2003 and 2004,
  were $ 236, $ 289 and $ (4), respectively and have been included in cost of
  revenues.
|            |                                         |                                                                                                                                                                                                                                                                                                        
|            | f.                                      | Investments in affiliates:                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                        
|            |                                         | Affiliated companies are companies over which the
  Group can exercise significant influence on their operating and financial
  policies, including one company in which the Group holds less than 20%. The
  investment in affiliated companies is accounted for by the equity method of
  accounting.
|            |                                         |                                                                                                                                                                                                                                                                                                        
|            | g.                                      | Property, plant and equipment:                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                        
|            |                                         | Property, plant and equipment are stated at cost,
  net of accumulated depreciation and investment grants. Depreciation is
  calculated by the straight-line method over the estimated useful lives of the
  assets at the following annual rates:                                                     

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

| |    |                                                                                                                                                                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Leasehold improvements are depreciated by the
  straight-line method over the term of the lease or the estimated useful life
  of the improvements, whichever is shorter.                                                                                                              
| |    |                                                                                                                                                                                                                                                                                        
| | h. | 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.

F-14

---

---



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

|            |                                         |                                                                                                                           
|----------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            |                                         | Amortization is calculated using the straight-line
  method over the estimated useful lives at the following annual rates:

| |                       |  |                      |    | 
| | --------------------- |  | -------------------- | -- | 
| |                       |  | Weighted
  average %
| |                       |  |                     
| |                       |  |                      |    | 
| | Technology            |  |                      | 20 | 
| | Customer relationship |  |                      | 21 | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i. | Impairment
  of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The Groups long-lived assets are reviewed for
  impairment in accordance with SFAS No. 144, Accounting for the
  Impairment or Disposal of Long-Lived Assets, whenever events or changes in
  circumstances indicate that the carrying amount of an asset may not be
  recoverable. Recoverability of assets to be held and used is measured by a
  comparison of the carrying amount of an asset to the future undiscounted cash
  flows expected to be generated by the asset. If such assets are considered to
  be impaired, the impairment to be recognized is measured by the amount by
  which the carrying amount of the assets exceeds the fair value of the assets.
  Assets to be disposed of are reported at the lower of the carrying amount or
  fair value less costs to sell. As of December 31, 2004, no impairment losses
  have been identified.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | j. | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Goodwill represents excess of the costs over the
  net assets of businesses acquired. Under SFAS No. 142, goodwill acquired in a
  business combination on or after July 1, 2001, is not amortized and all
  goodwill is not amortized after January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | SFAS No. 142 requires goodwill to be tested for
  impairment on adoption (January 1, 2002) and at least annually thereafter or
  between annual tests in certain circumstances, and written down when
  impaired, rather than being amortized as previous accounting standards
  required. Goodwill attributable to the Groups reporting unit is tested for
  impairment by comparing the fair value of each reporting unit with its
  carrying value. Fair value is determined using discounted cash flows and
  market multiples. Significant estimates used in the methodologies include
  estimates of future cash flows, future short-term and long-term growth rates
  and estimates of market multiples for the reportable unit. As of December 31,
  2004, no impairment losses have been identified.                                                        

F-15

---

---



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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- | --------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | k.                                      | Revenue recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | The Group derives its revenues from sales of
  lenses and from design services to third party lens manufacturers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | Revenues from sale of lenses are recognized in
  accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue
  Recognition in Financial Statements, when delivery has occurred, persuasive
  evidence of an agreement exists, the vendors fee is fixed or determinable,
  no further obligation exists and collectibility is probable. The Group has
  various programs that allow opticians to earn rebates on their accumulated
  purchases. Rebates are recognized as a reduction of revenues, in accordance
  with EITF No. 01-9, Accounting for Consideration Given by a Vendor to a
  Customer (Including a Reseller of the Vendors Products).
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | Design services are provided to third party
  manufacturers and include development services, production of molds for
  lenses and royalties from sales of lenses by third party manufacturers.
  Revenues from development services are recognized at the time services are
  provided. Revenues from production of molds are recognized upon delivery of
  the molds when all other criteria of SAB No. 104 are met. Revenues from
  minimum royalties are recognized when due. Other royalties are recognized
  quarterly, upon the receipt of sales reports from the third party
  manufacturer customers.                                                   
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | l.                                      | Research and development costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | Research and development costs are charged to the
  statement of income as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | m.                                      | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | No provision for income taxes is reflected in
  respect of Shamir in these financial statements, since the tax effects of
  Shamirs income are passed through to the individual shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | Shamirs subsidiaries account for income taxes in
  accordance with SFAS No. 109, Accounting for Income Taxes. This Statement
  prescribes the use of the liability method whereby deferred tax assets and
  liability account balances are determined based on differences between
  financial reporting and tax bases of assets and liabilities and are measured
  using the enacted tax rates and laws that will be in effect when the
  differences are expected to reverse. The Group provides a valuation
  allowance, if necessary, to reduce deferred tax assets to their estimated
  realizable value.                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | n.                                      | Advertising expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         | Advertising costs are expensed as incurred.
  Advertising expenses for the years ended December 31, 2002, 2003 and 2004
  were $ 2,000, $ 2,895 and $ 2,080, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F16

---

---



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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | o.                                      | Concentrations of credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         | Financial instruments that potentially subject the
  Group to concentrations of credit risk consist principally of cash and cash
  equivalents and trade receivables. The majority of the Groups cash and cash
  equivalents is invested mainly in dollar and Euro instruments with major
  banks in Israel, Germany and the U.S. Management believes that the financial
  institutions that hold the Groups investments are financially sound and
  accordingly, minimal credit risk exists with respect to these investments.                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         | The Groups trade receivables are derived from
  sales to customers located mainly in the U.S. and Europe. The Group performs
  ongoing credit evaluations of its customers and to date has not experienced
  any material losses. In certain circumstances, the Group may require letters
  of credit or prepayments. An allowance for doubtful accounts is determined
  with respect to those amounts that the Group has determined to be doubtful of
  collection. Provisions for doubtful accounts for the years ended December 31,
  2002, 2003 and 2004, were $ 164, $ 76 and $ 61, respectively, and were recorded
  in general and administrative expenses.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         | The Company entered into forward contracts and
  option strategies (together: derivative instruments) intended to protect
  against changes in foreign currencies. The derivative instruments were not
  qualified for hedge accounting under SFAS No. 133. All the derivatives are
  recognizes on the balance-sheet at their fair value, with changes in the fair
  value carried to the statements of income and included in financial expenses
  and other, net.                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | p.                                      | Severance pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         | The Groups liability for severance pay is
  calculated pursuant to Israeli Severance Pay Law based on the most recent
  salary of the Groups Israeli employees multiplied by the number of years of
  employment, as of balance sheet date. These employees are entitled to one
  months salary for each year of employment or a portion thereof. The Groups
  liability for these employees is fully provided by monthly deposits for
  insurance policies and by an accrual.                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         | The deposited funds include profits accumulated up
  to the balance sheet date. The deposited funds may be withdrawn only upon the
  fulfillment of the obligation pursuant to Israeli Severance Pay Law or labor
  agreements. The value of the deposited funds is based on the cash surrendered
  value of these policies and includes immaterial profits.                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         | Severance
  expenses for the years ended December 31, 2002, 2003 and 2004 amounted to
  $ 255, $ 362 and $ 388, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | q. | Net earnings
  per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Basic net earnings
  per share are computed based on the weighted average number of shares
  outstanding during each year. Diluted net earnings per share are computed
  based on the weighted average number of shares outstanding during each year,
  plus dilutive potential shares considered outstanding during the year, in
  accordance with SFAS No. 128, Earnings per Share.                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The total
  weighted average number of shares related to the outstanding options excluded
  from the calculations of diluted net earnings per share because these
  securities are anti-dilutive was 120,480 for the years ended December 31,
  2002, 2003 and 0 for the year ended December 31, 2004.                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Pro forma
  basic and diluted net earnings per share, as presented in the statements of
  income, have been calculated as described above and also give effect to the
  effect of pro-forma taxes on income and to conversion of the share capital
  into Common shares that occurred upon closing of the IPO on March 16, 2005.                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | r. | Accounting
  for stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The Group
  has elected to follow Accounting Principles Board Opinion (APB) No. 25,
  Accounting for Stock Issued to Employees and FASB Interpretation (FIN)
  No. 44, Accounting for Certain Transactions Involving Stock Compensation in
  accounting for its employee share option plan. Under APB No. 25, when the
  exercise price of an employee share option is equivalent to or above the
  market price of the underlying stock on the date of grant, no compensation
  expense is recognized.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Pro-forma
  information regarding the Groups net income and net earnings per share is
  required by SFAS No. 123, Accounting for Stock-Based Compensation and SFAS
  No. 148, Accounting for Stock-Based Compensation - Transition and
  Disclosure and has been determined as if the Group had accounted for its
  employee share options under the fair value method prescribed by SFAS No.
  123.                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The fair
  value for options granted in 2003 and 2004 is amortized over their vesting
  period and estimated at the date of grant using the Black-Scholes options
  pricing model with the following assumptions: dividend yield - 0%, expected
  volatility - 0.34%, risk free interest rate - 1% and expected life of 4
  years.                                                                                                                                                                             

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.)
|            |                                        
|            |                                         | Pro forma
  information under SFAS No. 123 is as follows:

| |                                                             |  |                         |       |      |   |        |   |   |       |  
| | ----------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ------ | - | - | ----- | -
| |                                                             |  | Year ended December 31, |      
| |                                                             |  |                         |      
| |                                                             |  | 2002                    |       | 2003 |   | 2004   |  
| |                                                             |  |                         |       |      |   |        |  
| |                                                             |  |                         |       |      |   |        |   |   |       |  
| | Net income available to
  shareholders - as reported        |  | $                       | 6,221 |      | $ | 5,237  |   | $ | 8,812 |  
| | Add - stock-based employee
  compensation - intrinsic value |  |                         | -     |      |   | 1,809  |   |   | 82    |  
| | Deduct - stock-based
  employee compensation -fair value    |  |                         | (305  | )    |   | (1,968 | ) |   | (246  | )
| |                                                             |  |                         |       |      |   |        |   |   |       |  
| | Pro forma:                                                  |  |                         |       |      |   |        |   |   |       |  
| | Net income                                                  |  | $                       | 5,916 |      | $ | 5,078  |   | $ | 8,648 |  
| |                                                             |  |                         |       |      |   |        |   |   |       |  
| |                                                             |  |                         |       |      |   |        |   |   |       |  
| | Basic net earnings per
  share as reported                  |  | $                       | 0.52  |      | $ | 0.43   |   | $ | 0.70  |  
| |                                                             |  |                         |       |      |   |        |   |   |       |  
| |                                                             |  |                         |       |      |   |        |   |   |       |  
| | Diluted net earnings per
  share as reported                |  | $                       | 0.52  |      | $ | 0.43   |   | $ | 0.68  |  
| |                                                             |  |                         |       |      |   |        |   |   |       |  
| |                                                             |  |                         |       |      |   |        |   |   |       |  
| | Pro forma basic net
  earnings per share                    |  | $                       | 0.49  |      | $ | 0.42   |   | $ | 0.68  |  
| |                                                             |  |                         |       |      |   |        |   |   |       |  
| |                                                             |  |                         |       |      |   |        |   |   |       |  
| | Pro forma diluted net
  earnings per share                  |  | $                       | 0.49  |      | $ | 0.42   |   | $ | 0.67  |  
| |                                                             |  |                         |       |      |   |        |   |   |       |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | s. | Fair value of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The
  following methods and assumptions were used by the Group in estimating fair
  value and disclosures for financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The carrying
  amount reported in the balance sheet for cash and cash equivalents, trade
  receivables, short-term bank credit and trade payables approximate their fair
  values due to the short-term maturities of such instruments. The fair value
  of long-term loans is estimated by discounting the future cash flows using
  the current interest rate for loans of similar terms and maturities. The
  carrying amount of the long-term loans approximates their fair value.                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | t. | Impact of
  recently issued accounting standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | In November
  2004, the FASB issued SFAS No. 151, Inventory Costs, an Amendment of ARB No.
  43, Chapter 4. SFAS No. 151 amends Accounting Research Bulletin (ARB) No.
  43, Chapter 4, to clarify that abnormal amounts of idle facility expense,
  freight handling costs and wasted materials (spoilage) should be recognized as
  current-period charges. In addition, SFAS No. 151 requires that the
  allocation of fixed production overheads to the costs of conversion be based
  on the normal capacity of the production facilities. SFAS No. 151 is
  effective for inventory costs incurred during fiscal years beginning after
  June 15, 2005. The Company does not expect that the adoption of SFAS No. 151
  will have a material effect on its financial position or results of
  operations.

F-19

---

---



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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:    | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            |                                         | On December
  16, 2004, the Financial Accounting Standards Board (FASB) issued Statement
  No. 123 (revised 2004), Share-Based Payment (Statement 123R), which is a
  revision of FASB Statement No. 123, Accounting for Stock-Based Compensation
  (Statement 123). Generally, the approach in Statement 123R is similar to
  the approach described in Statement 123. However, Statements 123 permitted,
  but not required, share-based payments to employees to be recognized based on
  their fair values while Statement 123R requires all share-based payments to
  employees to be recognized based on their fair values. Statement 123R also
  revises, clarifies and expands guidance in several areas, including measuring
  fair value, classifying an award as equity or as a liability and attributing
  compensation cost to reporting periods. The new Standard will be effective
  for the Company in the first fiscal year beginning after June 15, 2005. As
  permitted by SFAS No. 123, the Company currently accounts for share-based
  payments to employees using APB No. 25s intrinsic value method. Accordingly,
  the adoption of Statement 123(R)s fair value method will have a significant
  impact on the Companys result of operations, although it will have no impact
  on its overall financial position. The impact of adoption of Statement 123(R)
  cannot be predicted at this time because it will depend on levels of
  share-based payments granted in the future. However, had the Company adopted
  Statement 123(R) in prior periods, the impact of that standard would have
  approximated the impact of SFAS No. 123 as described in the disclosure of pro
  forma net income and earnings per share in Note 2(q) to the consolidated
  financial statements.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|NOTE 3:    | OTHER RECEIVABLES AND PREPAID EXPENSES 

| |                        |  |                |       |      |   |       | 
| | ---------------------- |  | -------------- | ----- | ---- | - | ----- | 
| |                        |  | December
  31, |      
| |                        |  |                |      
| |                        |  | 2003           |       | 2004 |  
| |                        |  |                |       |      |  
| |                        |  |                |       |      |   |       | 
| | Prepaid expenses       |  | $              | 131   |      | $ | 281   | 
| | Government authorities |  |                | 836   |      |   | 1,195 | 
| | Deferred tax assets    |  |                | 443   |      |   | 518   | 
| | Related parties        |  |                | 141   |      |   | 395   | 
| | Other                  |  |                | 554   |      |   | 710   | 
| |                        |  |                |       |      |   |       | 
| |                        |  |                |       |      |   |       | 
| |                        |  | $              | 2,105 |      | $ | 3,099 | 
| |                        |  |                |       |      |   |       | 

|            |          
|----------- | ---------
|NOTE 4:    | INVENTORY

| |                  |  |   |        |  |   |        | 
| | ---------------- |  | - | ------ |  | - | ------ | 
| | Raw materials    |  | $ | 1,675  |  | $ | 2,106  | 
| | Work-in-progress |  |   | 179    |  |   | 371    | 
| | Finished goods   |  |   | 10,928 |  |   | 13,819 | 
| |                  |  |   |        |  |   |        | 
| |                  |  |   |        |  |   |        | 
| |                  |  | $ | 12,782 |  | $ | 16,296 | 
| |                  |  |   |        |  |   |        | 

F-20

---

---



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

|            |                              
|----------- | -----------------------------
|NOTE 5:    | PROPERTY, PLANT AND EQUIPMENT
|            |                              

| |                                              |  |              |        |      |   |        | 
| | -------------------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
| |                                              |  | December 31, |       
| |                                              |  |              |       
| |                                              |  | 2003         |        | 2004 |  
| |                                              |  |              |        |      |  
| |                                              |  |              |        |      |  
| | Cost:                                        |  |              |        |      |   |        | 
| | Machinery and manufacturing
  equipment      |  | $            | 16,441 |      | $ | 18,347 | 
| | Furniture and office
  equipment             |  |              | 2,480  |      |   | 3,598  | 
| | Motor vehicles                               |  |              | 469    |      |   | 573    | 
| | Land, buildings and
  leasehold improvements |  |              | 4,739  |      |   | 5,603  | 
| |                                              |  |              |        |      |   |        | 
| |                                              |  |              |        |      |   |        | 
| |                                              |  |              | 24,129 |      |   | 28,121 | 
| |                                              |  |              |        |      |   |        | 
| |                                              |  |              |        |      |   |        | 
| | Accumulated depreciation                     |  |              | 9,936  |      |   | 12,512 | 
| |                                              |  |              |        |      |   |        | 
| |                                              |  |              |        |      |   |        | 
| | Depreciated cost                             |  | $            | 14,193 |      | $ | 15,609 | 
| |                                              |  |              |        |      |   |        | 

| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | Depreciation
  expense totaled $ 2,439, $ 3,658 and $ 3,632 for the years ended December 31,
  2002, 2003 and 2004, respectively.
| |                                                                                                                                  
| | As
  for pledges, see Note 11c.                                                                                                  

|            |              |                
|----------- | ------------ | ---------------
|NOTE 6:    | OTHER ASSETS
|            |             
|            | a.           | Other
  assets:

| |                                  |  |              |     |      |   |       | 
| | -------------------------------- |  | ------------ | --- | ---- | - | ----- | 
| |                                  |  | December 31, |    
| |                                  |  |              |    
| |                                  |  | 2003         |     | 2004 |  
| |                                  |  |              |     |      |  
| |                                  |  |              |     |      |   |       | 
| | Deferred income taxes            |  | $            | -   |      | $ | 641   | 
| | Prepaid issuance costs           |  |              | -   |      |   | 296   | 
| | Other intangible assets, net (b) |  |              | 579 |      |   | 1,357 | 
| |                                  |  |              |     |      |   |       | 
| |                                  |  |              |     |      |   |       | 
| | Total other assets               |  | $            | 579 |      | $ | 2,294 | 
| |                                  |  |              |     |      |   |       | 

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

| |                               |  |              |     |      |   |       | 
| | ----------------------------- |  | ------------ | --- | ---- | - | ----- | 
| |                               |  | December 31, |    
| |                               |  |              |    
| |                               |  | 2003         |     | 2004 |  
| |                               |  |              |     |      |  
| | Original amounts:             |  |              |     |      |   |       | 
| | Technology                    |  | $            | 96  |      | $ | 311   | 
| | Customer relationship         |  |              | 483 |      |   | 1,219 | 
| |                               |  |              |     |      |   |       | 
| |                               |  |              |     |      |   |       | 
| |                               |  |              | 579 |      |   | 1,530 | 
| |                               |  |              |     |      |   |       | 
| | Accumulated amortization:     |  |              |     |      |   |       | 
| | Technology                    |  |              | -   |      |   | 42    | 
| | Customer relationship         |  |              | -   |      |   | 131   | 
| |                               |  |              |     |      |   |       | 
| |                               |  |              |     |      |   |       | 
| |                               |  |              | -   |      |   | 173   | 
| |                               |  |              |     |      |   |       | 
| |                               |  |              |     |      |   |       | 
| | Total other intangible assets |  | $            | 579 |      | $ | 1,357 | 
| |                               |  |              |     |      |   |       | 

| |  |     |                                                                                                                           
| |  | --- | --------------------------------------------------------------------------------------------------------------------------
| |  | (2) | Amortization expense
  amounted to $ 0 $ 0 and $ 173 for the years ended December 31, 2002,
  2003 and 2004, respectively.

F-21

---

---



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

|            |                                     
|----------- | ------------------------------------
|NOTE 6:    | OTHER INTANGIBLE ASSETS, NET (Cont.)

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

| |                       |  |              |       | 
| | --------------------- |  | ------------ | ----- | 
| |                       |  | December 31, |      
| |                       |  |              |      
| |                       |  |              |       | 
| | 2005                  |  | $            | 316   | 
| | 2006                  |  |              | 316   | 
| | 2007                  |  |              | 284   | 
| | 2008                  |  |              | 222   | 
| | 2009 and
  thereafter |  |              | 219   | 
| |                       |  |              |       | 
| |                       |  |              |       | 
| |                       |  | $            | 1,357 | 
| |                       |  |              |       | 

|            |         
|----------- | --------
|NOTE 7:    | GOODWILL

| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | The changes
  in the carrying amount of goodwill for the years ended December 31, 2003 and
  2004, are as follows:

| |                                            |  |   |       | 
| | ------------------------------------------ |  | - | ----- | 
| | Balance as of January 1, 2003              |  | $ | 338   | 
| | Goodwill
  acquired during the year        |  |   | 1,696 | 
| |                                            |  |   |       | 
| |                                            |  |   |       | 
| | Balance as of December 31,
  2003          |  |   | 2,034 | 
| | Goodwill
  acquired during the year        |  |   | 1,798 | 
| | Foreign
  currency translation adjustments |  |   | 154   | 
| |                                            |  |   |       | 
| |                                            |  |   |       | 
| | Balance as of December 31, 2004            |  | $ | 3,986 | 
| |                                            |  |   |       | 

|            |                                       
|----------- | --------------------------------------
|NOTE 8:    | ACCRUED EXPENSES AND OTHER LIABILITIES

| |                                |  |                |       |      |   |       | 
| | ------------------------------ |  | -------------- | ----- | ---- | - | ----- | 
| |                                |  | December
  31, |      
| |                                |  |                |      
| |                                |  | 2003           |       | 2004 |  
| |                                |  |                |       |      |  
| |                                |  |                |       |      |   |       | 
| | Employees and payroll accruals |  | $              | 1,811 |      | $ | 1,916 | 
| | Accrued expenses               |  |                | 4,771 |      |   | 3,464 | 
| | Advances from customers        |  |                | 406   |      |   | 21    | 
| | Government authorities         |  |                | 1,078 |      |   | 1,869 | 
| | Related party                  |  |                | 15    |      |   | -     | 
| | Others                         |  |                | 261   |      |   | 1,261 | 
| |                                |  |                |       |      |   |       | 
| |                                |  |                |       |      |   |       | 
| |                                |  | $              | 8,342 |      | $ | 8,531 | 
| |                                |  |                |       |      |   |       | 

F-22

---

---



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

|            |                                 
|----------- | --------------------------------
|NOTE 9:    | SHORT-TERM BANK CREDIT AND LOANS

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

| |                                          |  |                                   |      |                |  |      |  |      |       |  |   |        | 
| | ---------------------------------------- |  | --------------------------------- | ---- | -------------- |  | ---- |  | ---- | ----- |  | - | ------ | 
| |                                          |  | Weighted
  averageinterest
  rate |      |                |  |      |  |      |      
| |                                          |  |                                   |      |                |  |      |  |      |      
| |                                          |  | December
  31,                    |      | December
  31, | 
| |                                          |  |                                   |      |                | 
| |                                          |  | 2003                              |      | 2004           |  | 2003 |  | 2004 |      
| |                                          |  |                                   |      |                |  |      |  |      |      
| |                                          |  | %                                 |      |                |  |      |  |      |      
| |                                          |  |                                   |      |                |  |      |  |      |      
| | Short-term bank loans:                   |  |                                   |      |                |  |      |  |      |       |  |   |        | 
| | Dollars                                  |  |                                   | 3.2  |                |  | 3.9  |  | $    | 2,982 |  | $ | 322    | 
| | Euro                                     |  |                                   | 3.7  |                |  | 3.6  |  |      | 5,103 |  |   | 8,662  | 
| | NIS                                      |  |                                   | 5.7  |                |  | -    |  |      | 325   |  |   | -      | 
| |                                          |  |                                   |      |                |  |      |  |      |       |  |   |        | 
| |                                          |  |                                   |      |                |  |      |  |      |       |  |   |        | 
| |                                          |  |                                   |      |                |  |      |  |      | 8,410 |  |   | 8,984  | 
| |                                          |  |                                   |      |                |  |      |  |      |       |  |   |        | 
| |                                          |  |                                   |      |                |  |      |  |      |       |  |   |        | 
| | Short-term bank credit                   |  |                                   | 5.75 |                |  | 3.3  |  |      | 16    |  |   | 2,002  | 
| |                                          |  |                                   |      |                |  |      |  |      |       |  |   |        | 
| |                                          |  |                                   |      |                |  |      |  |      |       |  |   |        | 
| | Total short-term bank credit
  and loans |  |                                   | 3.6  |                |  | 3.5  |  | $    | 8,426 |  | $ | 10,986 | 
| |                                          |  |                                   |      |                |  |      |  |      |       |  |   |        | 

| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | As of
  December 31, 2004, the Group has authorized unused credit lines from banks in
  the amount of approximately $ 11,700.

|            |                
|----------- | ---------------
|NOTE 10:   | LONG-TERM LOANS

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

| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 
| | ------------------------- |  | --------------- | --- | -------------- |  | ---- |  | ---- | ----- |  | - | ----- | 
| |                           |  | Interest
  rate |     |                |  |      |  |      |      
| |                           |  |                 |     |                |  |      |  |      |      
| |                           |  | December
  31,  |     | December
  31, | 
| |                           |  |                 |     |                | 
| |                           |  | 2003            |     | 2004           |  | 2003 |  | 2004 |      
| |                           |  |                 |     |                |  |      |  |      |      
| |                           |  | %               |     |                |  |      |  |      |      
| |                           |  |                 |     |                |  |      |  |      |      
| | Banks:                    |  |                 |     |                |  |      |  |      |       |  |   |       | 
| | Dollars                   |  |                 | 3.9 |                |  | 4.0  |  | $    | 1,623 |  | $ | 761   | 
| | Euro                      |  |                 | 4.9 |                |  | 4.2  |  |      | 4,229 |  |   | 3,970 | 
| | NIS                       |  |                 | 4.9 |                |  | 4.5  |  |      | 1,878 |  |   | 1,729 | 
| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 
| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 
| |                           |  |                 |     |                |  |      |  |      | 7,730 |  |   | 6,460 | 
| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 
| | Others:                   |  |                 |     |                |  |      |  |      |       |  |   |       | 
| | Dollars                   |  |                 | 3   |                |  | -    |  |      | 346   |  |   | -     | 
| | Euro                      |  |                 | 5.5 |                |  | 2.9  |  |      | 232   |  |   | 1,341 | 
| | GBP                       |  |                 | -   |                |  | 6.8  |  |      | -     |  |   | 720   | 
| | NIS                       |  |                 | 4   |                |  | -    |  |      | 51    |  |   | -     | 
| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 
| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 
| |                           |  |                 |     |                |  |      |  |      | 629   |  |   | 2,061 | 
| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 
| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 
| | Total long-term loans     |  |                 |     |                |  |      |  |      | 8,359 |  |   | 8,521 | 
| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 
| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 
| | Less - current maturities |  |                 |     |                |  |      |  |      | 3,784 |  |   | 3,857 | 
| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 
| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 
| |                           |  |                 |     |                |  |      |  | $    | 4,575 |  | $ | 4,664 | 
| |                           |  |                 |     |                |  |      |  |      |       |  |   |       | 

F-23

---

---



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

|            |                         |                                     
|----------- | ----------------------- | ------------------------------------
|NOTE 10:   | LONG-TERM LOANS (Cont.)
|            |                        
|            | b.                      | Long-term
  loans mature as follows:

| |                           |  |   |       | 
| | ------------------------- |  | - | ----- | 
| | 2005 (current maturities) |  | $ | 3,857 | 
| | 2006                      |  |   | 1,521 | 
| | 2007                      |  |   | 1,700 | 
| | 2008 and thereafter       |  |   | 1,443 | 
| |                           |  |   |       | 
| |                           |  |   |       | 
| |                           |  | $ | 8,521 | 
| |                           |  |   |       | 

| | c. | Financial
  covenant:                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                         
| |    | Shamir
  and Eyal have undertaken to maintain a certain financial ratio in Eyals
  financial statements in respect of Eyals loan from a bank (as of December
  31, 2004 - $ 1,019). As of December 31, 2004, Eyal was in compliance with this
  ratio.
| |    |                                                                                                                                                                                                                                                         

|            |                                       
|----------- | --------------------------------------
|NOTE 11:   | COMMITMENTS AND CONTINGENT LIABILITIES

| | a. | Legal
  proceedings:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In November
  2003, one of the Groups laboratory customers in the United States was
  notified by a large lens manufacturer that the manufacturer believes that
  lenses produced by the laboratory using the Groups prescription software
  infringe upon a U.S. patent held by the manufacturer. The Group has entered
  into negotiations with the manufacturer with regard to this patent in order
  to reach an amicable resolution of the matter. The Group cannot predict the
  outcome of the claim nor can it make any estimate of the amount of damages,
  if held responsible.              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In September
  2003, the Group received a separate and, on the face of it, unrelated
  notification from a different large lens manufacturer in which the
  manufacturer claimed that the lenses produced using the Groups prescription
  software infringe upon a U.S. patent held by the manufacturer. The Group has
  denied any such infringement. The Group has entered into negotiations with
  this manufacturer and has asked for clarification of his claims. The Group
  cannot predict the outcome of the claim nor can it make any estimate of the
  amount of damages, if held responsible.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | b. | Lease
  commitments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The land and
  certain of the Groups facilities are leased under operating lease
  agreements. Future minimum lease commitments under non-cancelable operating
  leases for the specified periods ending after December 31, 2004 are as
  follows:                                                                                                                                                                                                                                                                                                                                                      

| |            |  |   |        | 
| | ---------- |  | - | ------ | 
| | 2005       |  | $ | 1,153  | 
| | 2006       |  |   | 993    | 
| | 2007       |  |   | 993    | 
| | 2008       |  |   | 680    | 
| | Thereafter |  |   | 6,539  | 
| |            |  |   |        | 
| |            |  |   |        | 
| |            |  | $ | 10,358 | 
| |            |  |   |        | 

| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Lease
  expenses for the years ended December 31, 2002, 2003 and 2004 were
  approximately $ 248, $ 273 and $ 572, respectively.

F-24

---

---



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

|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- | ---------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11:   | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|            |                                               
|            | c.                                             | Pledges:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | In order to
  secure government grants received by Shamir and Eyal under the Approved
  Enterprise programs pursuant to the Law for the Encouragement of Capital
  Investments, 1959, Shamir and Eyal granted pledges in favor of the State of
  Israel on all of its assets, by floating pledges unlimited in amount (se also
  Note 12d).                                                                                                                                                                                                       
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | To secure
  the fulfillment of Shamirs liabilities, Shamir granted a fixed pledge,
  unlimited in amount, in favor of banks, on its issued and outstanding share
  capital and goodwill and a floating pledge on all of its assets and rights.
  To secure the fulfillment of Eyal and Eyal Holdings liabilities, they
  granted pledges, unlimited in amount, in favor of banks, on all of their
  assets. Additionally, other Shamirs subsidiaries pledged assets in an
  aggregate amount of approximately $ 2,200 to secure bank commitments.
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|NOTE 12:   | TAXES ON INCOME                               
|            |                                               
|            | a.                                             | Up until
  December 31, 2004, Shamir was not assessed for tax purposes and its business
  results were passed through to its shareholders, therefore tax expenses of
  Shamir were not included in the statements of income. Commencing January 1,
  2005, Shamir became a taxable entity as a result of the change in legal
  status from an ACS to a corporation which took place in March 2005 (see also
  Note 1a).                                                                                                                                                                                                                                                                                                   
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | b.                                             | Measurement of taxable income under the Income Tax (Inflationary
  Adjustments) Law, 1985:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                | 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). As explained in Note 2b,
  the consolidated financial statements are presented in dollars. The
  differences between the change in the Israeli CPI and in the NIS/ dollar
  exchange rate cause a difference between taxable income or loss and the
  income or loss before taxes reflected in the consolidated financial
  statements. In accordance with paragraph 9(f) of SFAS No. 109, the Group has
  not provided deferred income taxes on this difference between the reporting
  currency amount and the tax basis of assets and liabilities.
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | c.                                             | Tax benefits under Israels Law for the Encouragement of Industry
  (Taxation), 1969:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                | Shamir and Eyal are Industrial companies,
  as defined by the above-mentioned law, and as such, are entitled to certain
  tax benefits including the right to deduct public issuance expenses and
  accelerated depreciation for tax purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-25

---

---



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

|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- | ----------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | d.                      | Tax benefits
  under the Israel Law for the Encouragement of Capital Investments, 1959 (the
  Law):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                         | Three programs of Shamir have been granted
  an Approved Enterprise status under the Law. According to the Law, Shamir
  is entitled to investment grants (up to 30% of investment cost) and also to a
  tax benefit, which grants Shamir tax exemption for a period of two years and
  a reduced tax rate of 25% for a period of five years. The period of benefits
  in respect of the first program was terminated in 2001. The period of
  benefits in respect of the last two programs of Shamir will terminate in the
  years 2005 and 2007. Shamir has applied for a fourth program, for which the
  period of benefits has not commenced yet.
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                         | Income of
  Shamir from sources other than the Approved Enterprise during the period of
  benefits will be taxable at the regular corporate tax rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                         | Certain
  programs of Eyals production facilities have been granted
  Approved Enterprise status under the Law. For these programs, Eyal
  has elected alternative benefits, waiving grants in return for tax
  exemptions. Income derived from
  the expansion programs is tax-exempt for a period of two years and is taxed
  at the reduced corporate tax rate of 25% for an additional period of five
  years. Income of Eyal from sources other than the Approved
  Enterprise during the period of benefits is taxable at the regular corporate
  tax rate.                                                                                 
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                         | The period
  of tax benefits detailed above is subject to limits of the earlier of 12
  years from the commencement of production or 14 years from receiving the
  approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                         | The Law also entitles Shamir and Eyal to
  claim accelerated depreciation on equipment used by the Approved Enterprise
  during five tax years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                         | The
  entitlement to the above benefits is subject to fulfilling the conditions
  stipulated by the Law, regulations published thereunder and instruments of
  approval for the specific investments in Approved Enterprises. In the event
  of failure to comply with these conditions, the benefits may be canceled and
  Shamir or Eyal may be required to refund the amount of the benefits, in whole
  or in part, including interest. As of December 31, 2004, Management believes
  that both Shamir and Eyal are meeting all conditions of the approvals.                                                                                    
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                         | A recent
  amendment to the Law, which has been officially published effective as of
  April 1, 2005 (the Amendment) has changed certain provisions of the Law.
  The Amendment enacted changes in the manner in which tax benefits are awarded
  under the Law so that companies no longer require Investment Center approval
  in order to qualify for tax benefits. The Companys existing Approved
  Enterprises will not be subject to the provisions of the Amendment.                                                                                                                                                                         
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | e.                      | Reduction in
  corporate tax rate:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                         | On June
  2004, the Israeli Parliament approved an amendment to the Income Tax
  Ordinance (No. 140 and Temporary Provision), which progressively reduces the
  regular corporate tax rate from 36% to 35% in 2004, 34% in 2005, 32% in 2006
  and to a rate of 30% in 2007.                                                                                                                                                                                                                                                                                                                                                                           

F-26

---

---



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

|            |                         |                                                                                                                                                                                                                                                                                        
|----------- | ----------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                                                                                                                                                                                                        
|            | f.                      | Deferred tax assets
  (liabilities):                                                                                                                                                                                                                                                   
|            |                         |                                                                                                                                                                                                                                                                                        
|            |                         | Deferred
  taxes reflect the net tax effect of temporary differences between the
  carrying amounts of assets and liabilities for financial reporting purposes
  and the amounts used for tax purposes. Components of the Groups deferred tax
  assets and liabilities are as follows:

| |                                      |  |              |     |      |   |       |  
| | ------------------------------------ |  | ------------ | --- | ---- | - | ----- | -
| |                                      |  | December 31, |    
| |                                      |  |              |    
| |                                      |  | 2003         |     | 2004 |  
| |                                      |  |              |     |      |  
| |                                      |  |              |     |      |   |       |  
| | Deferred tax assets:                 |  |              |     |      |   |       |  
| | Inventory                            |  | $            | 324 |      | $ | 396   |  
| | Net operating losses carry
  forward |  |              | -   |      |   | 518   |  
| | Other                                |  |              | 119 |      |   | 245   |  
| |                                      |  |              |     |      |   |       |  
| |                                      |  |              |     |      |   |       |  
| | Total deferred tax assets            |  |              | 443 |      |   | 1,159 |  
| |                                      |  |              |     |      |   |       |  
| |                                      |  |              |     |      |   |       |  
| | Deferred tax liabilities:            |  |              |     |      |   |       |  
| | Property and equipment               |  |              | -   |      |   | (168  | )
| | Other intangible assets              |  |              | -   |      |   | (264  | )
| |                                      |  |              |     |      |   |       |  
| |                                      |  |              |     |      |   |       |  
| | Total deferred tax liabilities       |  |              | -   |      |   | (432  | )
| |                                      |  |              |     |      |   |       |  
| |                                      |  |              |     |      |   |       |  
| | Net deferred tax assets *)           |  | $            | 443 |      | $ | 727   |  
| |                                      |  |              |     |      |   |       |  

| |    |                                                                                                                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *) | Deferred tax
  assets of $ 443 and $ 518 have been included in other receivables and prepaid
  expenses and $ 0 and $ 641 have been included in other assets, as of December
  31, 2003 and 2004, respectively (see Note 6a).

F-27

---

---



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

|            |                         |                                                                                                          
|----------- | ----------------------- | ---------------------------------------------------------------------------------------------------------
|NOTE 12:   | TAXES ON INCOME (Cont.)
|            |                         |                                                                                                          
|            | g.                      | A
  reconciliation of the Groups effective tax rate to the statutory tax rate in
  Israel is as follows:

| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| | ------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | -- | - | ------ | --
| |                                                                                                                     |  | Year ended December 31, |      
| |                                                                                                                     |  |                         |      
| |                                                                                                                     |  | 2002                    |       | 2003 |   | 2004  |   
| |                                                                                                                     |  |                         |       |      |   |       |   
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| | Income before taxes on
  income                                                                                     |  | $                       | 7,811 |      | $ | 7,943 |    | $ | 11,663 |   
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| | Statutory tax rate in
  Israel                                                                                      |  |                         | 36    | %    |   | 36    | %  |   | 35     | % 
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| | Increase
  (decrease) in tax expenses resulting from:                                                               |  |                         |       |      |   |       |    |   |        |   
| | Income passed through to
  Shamirs shareholders                                                                    |  |                         | (18.1 | )%   |   | (14.4 | )% |   | (18.4  | )%
| | Approved Enterprise
  benefits                                                                                    |  |                         | (5.4  | )%   |   | (7.6  | )% |   | (2.8   | )%
| | Others                                                                                                              |  |                         | -     |      |   | (0.2  | )% |   | (0.5   | )%
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| | Effective tax rate                                                                                                  |  |                         | 12.5  | %    |   | 13.8  | %  |   | 13.3   | % 
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| | Pro-forma additional taxes
  on income in respect of income passed to the shareholders                              |  |                         | 13.8  | %    |   | 14.9  | %  |   | 14.6   | % 
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| | Pro-forma effective tax
  rate                                                                                      |  |                         | 26.3  | %    |   | 28.7  | %  |   | 27.9   | % 
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   
| | Basic and diluted net
  earnings per share amounts of the benefit resulting from the Approved
  Enterprise status |  | $                       | 0.03  |      | $ | 0.05  |    | $ | 0.03   |   
| |                                                                                                                     |  |                         |       |      |   |       |    |   |        |   

| |    |                                                         
| | -- | --------------------------------------------------------
| | h. | Income
  before taxes on income is comprised as follows:

| |          |  |   |       |  |   |       |  |   |        | 
| | -------- |  | - | ----- |  | - | ----- |  | - | ------ | 
| | Domestic |  | $ | 5,886 |  | $ | 4,439 |  | $ | 9,095  | 
| | Foreign  |  |   | 1,925 |  |   | 3,504 |  |   | 2,568  | 
| |          |  |   |       |  |   |       |  |   |        | 
| |          |  |   |       |  |   |       |  |   |        | 
| |          |  | $ | 7,811 |  | $ | 7,943 |  | $ | 11,663 | 
| |          |  |   |       |  |   |       |  |   |        | 

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

| |                                 |  |                         |       |      |   |       |   |   |       |  
| | ------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | -
| |                                 |  | Year ended December 31, |      
| |                                 |  |                         |      
| |                                 |  | 2002                    |       | 2003 |   | 2004  |  
| |                                 |  |                         |       |      |   |       |  
| |                                 |  |                         |       |      |   |       |   |   |       |  
| | Current taxes                   |  | $                       | 1,039 |      | $ | 1,539 |   | $ | 1,553 |  
| | Taxes in respect of prior years |  |                         | (26   | )    |   | (109  | ) |   | 7     |  
| | Deferred tax benefit            |  |                         | (34   | )    |   | (335  | ) |   | (11   | )
| |                                 |  |                         |       |      |   |       |   |   |       |  
| |                                 |  |                         |       |      |   |       |   |   |       |  
| |                                 |  | $                       | 979   |      | $ | 1,095 |   | $ | 1,549 |  
| |                                 |  |                         |       |      |   |       |   |   |       |  
| |                                 |  |                         |       |      |   |       |   |   |       |  
| | Domestic                        |  | $                       | 114   |      | $ | (214  | ) | $ | 789   |  
| | Foreign                         |  |                         | 865   |      |   | 1,309 |   |   | 760   |  
| |                                 |  |                         |       |      |   |       |   |   |       |  
| |                                 |  |                         |       |      |   |       |   |   |       |  
| |                                 |  | $                       | 979   |      | $ | 1,095 |   | $ | 1,549 |  
| |                                 |  |                         |       |      |   |       |   |   |       |  

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 13:   | SHAREHOLDERS EQUITY
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | a.                   | General:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      | All share
  and per share data included in these financial statements for all periods
  presented have been retroactively adjusted to reflect the reorganization of
  Shamirs equity approved on March 6, 2005, according to which each share of
  Shamir was converted into 120.48 Common shares of the reorganized
  corporation.                                                                                                                                                             
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | b.                   | Share
  rights:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      | Common shares
  of Shamir confer upon their holders the right to receive notice to
  participate and vote in the general meetings of Shamir and the right to
  receive dividends when declared.                                                                                                                                                                                                                                                                                                  
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | c.                   | Issuance of
  shares:                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      | On June 28,
  2004, Shamir issued 160,961 shares to a third party investor for a net amount
  of $ 1,945.                                                                                                                                                                                                                                                                                                                                                                                        
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | d.                   | Share option
  plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      | In
  2003, Shamir adopted an employee share option plan (the 2003 Option Plan).
  Under the 2003 Option Plan, employees and officers of the Group may be
  granted options to acquire shares. The number of options to acquire Common
  shares and the related exercise price are determined by the Board of
  Directors of Shamir. Starting 2004, all new grants of options will vest in
  four tranches of 25% per year. Options granted during 2004 will expire no
  later than August 2011.
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      | A
  summary of the activity in the share options granted to employees and related
  information is as follows:                                                                                                                                                                                                                                                                                                                                                                                   

| |                                            |  |                     |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |           |  |   |       | 
| | ------------------------------------------ |  | ------------------- | ------- | ------------------------------------- | - | ------------------- |  | ------------------------------------- | ------- | ------------------- | - | ------------------------------------- |  |  | --------- |  | - | ----- | 
| |                                            |  | December 31,        |        
| |                                            |  |                     |        
| |                                            |  | 2002                |         | 2003                                  |   | 2004                | 
| |                                            |  |                     |         |                                       |   |                     | 
| |                                            |  | Number of
  options |         | Weighted
  average
  exercise
  price |   | Number of
  options |  | Weighted
  average
  exercise
  price |         | Number of
  options |   | Weighted
  average
  exercise
  price | 
| |                                            |  |                     |         |                                       |   |                     |  |                                       |         |                     |   |                                       | 
| |                                            |  |                     |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |           |  |   |       | 
| | Outstanding at the beginning of the year   |  |                     | 120,480 |                                       | $ | 9.96                |  |                                       | 120,480 |                     | $ | 9.96                                  |  |  | 454,811   |  | $ | 3.54  | 
| | Granted                                    |  |                     | -       |                                       |   | -                   |  |                                       | 334,331 |                     | $ | 1.23                                  |  |  | 683,120   |  | $ | 11.07 | 
| |                                            |  |                     |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |           |  |   |       | 
| |                                            |  |                     |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |           |  |   |       | 
| | Outstanding at the end of the year         |  |                     | 120,480 |                                       | $ | 9.96                |  |                                       | 454,811 |                     | $ | 3.54                                  |  |  | 1,137,931 |  | $ | 8.06  | 
| |                                            |  |                     |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |           |  |   |       | 
| |                                            |  |                     |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |           |  |   |       | 
| | Options exercisable at the end of the year |  |                     | 103,371 |                                       | $ | 9.96                |  |                                       | 454,811 |                     | $ | 3.54                                  |  |  | 454,811   |  | $ | 3.54  | 
| |                                            |  |                     |         |                                       |   |                     |  |                                       |         |                     |   |                                       |  |  |           |  |   |       | 

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 13:   | SHAREHOLDERS EQUITY (Cont.)
|            |                              |                                                                                                                    
|            |                              | The options
  outstanding as of December 31, 2004, have been separated into exercise price
  categories as follows:

| |                            |  |                                                     |           |                                                     |  |                                       |      |                                                     |  |                                                                  | 
| | -------------------------- |  | --------------------------------------------------- | --------- | --------------------------------------------------- |  | ------------------------------------- | ---- | --------------------------------------------------- |  | ---------------------------------------------------------------- | 
| | Ranges of
  exercise price |  | Options
  outstanding
  as of
  December 31,
  2004 |           | Weighted
  average
  remaining
  contractual
  life |  | Weighted
  average
  exercise
  price |      | Options
  exercisable
  as of
  December 31,
  2004 |  | Weighted
  average
  exercise
  price of
  exercisable
  options | 
| |                            |  |                                                     |           |                                                     |  |                                       |      |                                                     |  |                                                                  | 
| | $                          |  |                                                     |           | (Years)                                             |  | $                                     |      |                                                     |  | $                                                                | 
| |                            |  |                                                     |           |                                                     |  |                                       |      |                                                     |  |                                                                  | 
| |                            |  |                                                     |           |                                                     |  |                                       |      |                                                     |  |                                                                  | 
| | 0.00                       |  |                                                     | 167,226   |                                                     |  |                                       | 8.75 |                                                     |  |                                                                  | 
| | 2.46                       |  |                                                     | 167,105   |                                                     |  |                                       | 8.75 |                                                     |  |                                                                  | 
| | 9.96  12.43               |  |                                                     | 803,600   |                                                     |  |                                       | 6.25 |                                                     |  |                                                                  | 
| |                            |  |                                                     |           |                                                     |  |                                       |      |                                                     |  |                                                                  | 
| |                            |  |                                                     |           |                                                     |  |                                       |      |                                                     |  |                                                                  | 
| |                            |  |                                                     | 1,137,931 |                                                     |  |                                       | 6.99 |                                                     |  |                                                                  | 
| |                            |  |                                                     |           |                                                     |  |                                       |      |                                                     |  |                                                                  | 

| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Weighted
  average fair values and weighted average exercise prices of options whose
  exercise price is equal to or lower than the fair value of the shares at date
  of grant are as follows:

| |                                        |  |                                                                          |   |                                                                              |   |      |  |      |      |      |   |      |  |   |      |  |   |       | 
| | -------------------------------------- |  | ------------------------------------------------------------------------ | - | ---------------------------------------------------------------------------- | - | ---- |  | ---- | ---- | ---- | - | ---- |  | - | ---- |  | - | ----- | 
| |                                        |  | Year ended December 31,                                                  |   | Year ended December 31,                                                      |  
| |                                        |  |                                                                          |   |                                                                              |  
| |                                        |  | 2002                                                                     |   | 2003                                                                         |   | 2004 |  | 2002 |      | 2003 |   | 2004 | 
| |                                        |  |                                                                          |   |                                                                              |   |      |  |      |      |      |   |      | 
| |                                        |  | Weighted average fair value
  of 
  options granted at an exercise price |   | Weighted average exercise
  price of 
  options granted at an exercise price |  
| |                                        |  |                                                                          |   |                                                                              |  
| | Equal to fair value at date of grant   |  | $                                                                        | - |                                                                              | $ | -    |  | $    | 3.49 |      | $ | -    |  | $ | -    |  | $ | 12.43 | 
| |                                        |  |                                                                          |   |                                                                              |   |      |  |      |      |      |   |      |  |   |      |  |   |       | 
| | Lower than fair value at date of grant |  | $                                                                        | - |                                                                              | $ | 5.50 |  | $    | 4.40 |      | $ | -    |  | $ | 1.23 |  | $ | 10.30 | 
| |                                        |  |                                                                          |   |                                                                              |   |      |  |      |      |      |   |      |  |   |      |  |   |       | 

| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Compensation
  expenses were $ 1,809 and $ 82 in the years ended December 31, 2003 and 2004,
  respectively.

|            |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | --------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14:   | TRANSACTIONS WITH RELATED PARTIES
|            |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | a.                                | Manpower
  agreement with Kibbutz Shamir (the Kibbutz):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                   | In 1999,
  Shamir signed a manpower agreement with the Kibbutz, its principal
  shareholder, pursuant to which the Kibbutz supplies labor services at
  Shamirs request. Pursuant to the agreement, the Kibbutz claims that the
  services provided by it are provided in its capacity as a contractor and that
  an employee-employer relationship shall not apply between Shamir and the
  members of the Kibbutz who provide the services. The Kibbutz is solely
  responsible for the performance of all obligations applicable to an employer
  with respect to the persons through whom it supplies labor services to
  Shamir. Manpower service fees amounted to $ 1,602, $ 1,619 and $ 1,584 for the
  years ended December 31, 2002, 2003 and 2004, respectively. On February 9,
  2005, the Company entered into new agreement with the Kibbutz. Under the new
  agreement the fees to be paid will be substantially similar to the amounts
  paid under the prior agreement.

F-30

---

---



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

|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | ----------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14:   | TRANSACTIONS WITH RELATED PARTIES (Cont.)
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | b.                                        | Service
  agreement with the Kibbutz:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                           | Shamir signed a service
  agreement with Kibbutz Shamir, pursuant to which the Kibbutz provides Shamir
  with services that include catering, security, laundry, switchboard and
  communications, maintenance, landscaping and trash removal, and payment of
  local authority taxes. Shamir paid the Kibbutz service fees amounting to
  $ 186, $ 224 and $ 246 for the years ended December 31, 2002, 2003 and 2004,
  respectively. On February 9, 2005, the Company entered into new agreement
  with the Kibbutz. Under the new agreement the fees to be paid will be
  substantially similar to the amounts paid under the prior agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | c.                                        | Lease
  agreement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                           | Shamirs offices,
  manufacturing, and research and development facilities are located on the
  grounds of Kibbutz Shamir. The facilities are sub-leased from Kibbutz Shamir,
  which has a long-term lease on the property from the Israel Lands
  Administration (the ILA). On January 5, 1999, Shamir and the Kibbutz
  signed a sub-lease agreement pursuant to which the Kibbutz sub-leased to
  Shamir the facilities for a period of twenty years beginning on
  January 1, 1999. Rental payments amounted to $ 248, $ 273 and $ 294 for the
  years ended December 31, 2002, 2003 and 2004, respectively. On February 9, 2005,
  the Company entered into an amendment to sub-lease agreement. The term of the
  amended agreement is extended from 20 years to 24 years and 22 months. Rental
  payments under the amended agreement are the same as under the prior
  agreement. The facilities are subleased from the Kibbutz, which has long term
  lease on the property from the ILA. The ILA may cancel the lease in certain
  circumstances, including if Kibbutz Shamir commences proceedings to disband
  or liquidate or in the event that Kibbutz Shamir ceases to be a kibbutz.
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | d.                                        | Consultancy
  services:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                           | One of Shamirs
  shareholders provides Shamir with consultancy services. Consultancy fees
  amounted to $ 84, $ 73 and $ 0 for the years ended December 31, 2002, 2003 and
  2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|NOTE 15:   | MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | a.                                        | The Group
  manages its business on the basis of one reportable segment. The data is
  presented in accordance with SFAS No. 131, Disclosure about Segments of an
  Enterprise and Related Information. Total revenues are attributed to
  geographic areas based on the location of end customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                           | The
  following presents total revenues and long-lived assets for the years ended
  December 31, 2002, 2003 and 2004 and as of December 31, 2002, 2003 and 2004,
  respectively:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                 |  |                   |        |                      |   |                   |  |                     |        |                   |   |                     |  |   |        |  |   |        | 
| | --------------- |  | ----------------- | ------ | -------------------- | - | ----------------- |  | ------------------- | ------ | ----------------- | - | ------------------- |  | - | ------ |  | - | ------ | 
| |                 |  | 2002              |        | 2003                 |   | 2004              | 
| |                 |  |                   |        |                      |   |                   | 
| |                 |  | Total 
  revenues |        | Long-lived 
  assets |   | Total 
  revenues |  | Long-lived
  assets |        | Total 
  revenues |   | Long-lived
  assets | 
| |                 |  |                   |        |                      |   |                   |  |                     |        |                   |   |                     | 
| |                 |  |                   |        |                      |   |                   |  |                     |        |                   |   |                     | 
| | Israel          |  | $                 | 1,300  |                      | $ | 7,473             |  | $                   | 906    |                   | $ | 11,068              |  | $ | 845    |  | $ | 11,172 | 
| | United
  States |  |                   | 15,653 |                      |   | 123               |  |                     | 19,808 |                   |   | 352                 |  |   | 21,938 |  |   | 484    | 
| | Europe          |  |                   | 29,156 |                      |   | 4,315             |  |                     | 36,507 |                   |   | 5,386               |  |   | 44,477 |  |   | 9,296  | 
| | Asia            |  |                   | 1,811  |                      |   | -                 |  |                     | 2,184  |                   |   | -                   |  |   | 2,454  |  |   | -      | 
| | Others          |  |                   | 818    |                      |   | -                 |  |                     | 674    |                   |   | -                   |  |   | 1,555  |  |   | -      | 
| |                 |  |                   |        |                      |   |                   |  |                     |        |                   |   |                     |  |   |        |  |   |        | 
| |                 |  |                   |        |                      |   |                   |  |                     |        |                   |   |                     |  |   |        |  |   |        | 
| |                 |  | $                 | 48,738 |                      | $ | 11,911            |  | $                   | 60,079 |                   | $ | 16,806              |  | $ | 71,269 |  | $ | 20,952 | 
| |                 |  |                   |        |                      |   |                   |  |                     |        |                   |   |                     |  |   |        |  |   |        | 

F-31

---

---



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

|            |                                                   |                                                                                                             
|----------- | ------------------------------------------------- | ------------------------------------------------------------------------------------------------------------
|NOTE 15:   | MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION (Cont.)
|            |                                                  
|            | b.                                                | Product
  lines:                                                                                            
|            |                                                   |                                                                                                             
|            |                                                   | Total
  revenues from external customers divided on the basis of the Groups product
  lines are as follows:

| |                   |  |                           |        |      |   |        |  |   |        | 
| | ----------------- |  | ------------------------- | ------ | ---- | - | ------ |  | - | ------ | 
| |                   |  | Year ended
  December 31, |       
| |                   |  |                           |       
| |                   |  | 2002                      |        | 2003 |   | 2004   | 
| |                   |  |                           |        |      |   |        | 
| |                   |  |                           |        |      |   |        | 
| | Lenses            |  | $                         | 40,450 |      | $ | 52,767 |  | $ | 64,282 | 
| | Design
  services |  |                           | 8,288  |      |   | 7,312  |  |   | 6,987  | 
| |                   |  |                           |        |      |   |        |  |   |        | 
| |                   |  |                           |        |      |   |        |  |   |        | 
| |                   |  | $                         | 48,738 |      | $ | 60,079 |  | $ | 71,269 | 
| |                   |  |                           |        |      |   |        |  |   |        | 

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

| |            |  |  |    |   |  |    |   |  |    |  
| | ---------- |  |  | -- | - |  | -- | - |  | -- | -
| | Customer A |  |  | 7  | % |  | 11 | % |  | 6  | %
| | Customer B |  |  | 6  | % |  | 8  | % |  | 8  | %
| |            |  |  |    |   |  |    |   |  |    |  
| |            |  |  |    |   |  |    |   |  |    |  
| |            |  |  | 13 | % |  | 19 | % |  | 14 | %
| |            |  |  |    |   |  |    |   |  |    |  

|            |                                                    
|----------- | ---------------------------------------------------
|NOTE 16:   | SUPPLEMENTARY DATA ON SELECTED STATEMENTS OF INCOME

| |    |                                                     |  |                           |       |      |   |       |   |   |       |  
| | -- | --------------------------------------------------- |  | ------------------------- | ----- | ---- | - | ----- | - | - | ----- | -
| |    |                                                     |  | Year ended
  December 31, |      
| |    |                                                     |  |                           |      
| |    |                                                     |  | 2002                      |       | 2003 |   | 2004  |  
| |    |                                                     |  |                           |       |      |   |       |  
| |    |                                                     |  |                           |       |      |   |       |  
| | a. | Financial
  expenses and other, net                 |  |                           |       |      |   |       |   |   |       |  
| |    |                                                     |  |                           |       |      |   |       |   |   |       |  
| |    | Financial
  expenses:                               |  |                           |       |      |   |       |   |   |       |  
| |    | Interest in
  respect of long-term loans            |  | $                         | 421   |      | $ | 762   |   | $ | 632   |  
| |    | Interest in
  respect of short-term loans           |  |                           | 142   |      |   | 330   |   |   | 340   |  
| |    | Changes in
  derivatives fair value                 |  |                           | -     |      |   | -     |   |   | 36    |  
| |    | Interest in respect of loans from related
  parties |  |                           | 340   |      |   | -     |   |   | -     |  
| |    | Foreign
  currency translation, net                 |  |                           | -     |      |   | 121   |   |   | -     |  
| |    | Other                                               |  |                           | 58    |      |   | -     |   |   | 440   |  
| |    |                                                     |  |                           |       |      |   |       |   |   |       |  
| |    |                                                     |  |                           |       |      |   |       |   |   |       |  
| |    |                                                     |  |                           | 961   |      |   | 1,213 |   |   | 1,448 |  
| |    |                                                     |  |                           |       |      |   |       |   |   |       |  
| |    | Financial
  income:                                 |  |                           |       |      |   |       |   |   |       |  
| |    | Income in respect of loans to related
  parties     |  |                           | -     |      |   | (94   | ) |   | (39   | )
| |    | Foreign
  currency translation, net                 |  |                           | (115  | )    |   | -     |   |   | (229  | )
| |    | Other                                               |  |                           | -     |      |   | (55   | ) |   | -     |  
| |    |                                                     |  |                           |       |      |   |       |   |   |       |  
| |    |                                                     |  |                           |       |      |   |       |   |   |       |  
| |    |                                                     |  |                           | (115  | )    |   | (149  | ) |   | (268  | )
| |    |                                                     |  |                           |       |      |   |       |   |   |       |  
| |    |                                                     |  |                           |       |      |   |       |   |   |       |  
| |    | Other
  expenses (income)                           |  |                           | 754   |      |   | -     |   |   | (316  | )
| |    |                                                     |  |                           |       |      |   |       |   |   |       |  
| |    |                                                     |  |                           |       |      |   |       |   |   |       |  
| |    |                                                     |  | $                         | 1,600 |      | $ | 1,064 |   | $ | 864   |  
| |    |                                                     |  |                           |       |      |   |       |   |   |       |  

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 16:   | SUPPLEMENTARY DATA ON SELECTED STATEMENTS OF INCOME (Cont.)
|            |                                                            
|            | b.                                                          | Net earnings
  per share:                                                                      
|            |                                                             |                                                                                                
|            |                                                             | The
  following table sets forth the computation of basic and diluted net earnings
  per share:

| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| | -- | ----------------------------------------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ |  | - | ------ | 
| |    |                                                                                     |  | Year ended
  December 31, |       
| |    |                                                                                     |  |                           |       
| |    |                                                                                     |  | 2002                      |        | 2003 |   | 2004   | 
| |    |                                                                                     |  |                           |        |      |   |        | 
| | 1. | Numerator:                                                                          |  |                           |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| |    | Numerator for basic and diluted net
  earnings per share -                          |  |                           |        |      |   |        |  |   |        | 
| |    | Net income
  available to shareholders                                              |  | $                         | 6,221  |      | $ | 5,237  |  | $ | 8,812  | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| | 2. | Denominator
  (in thousands):                                                       |  |                           |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| |    | Denominator for basic net earnings per
  share -                                    |  |                           |        |      |   |        |  |   |        | 
| |    | Weighted average shares - Shareholders
  equity                                    |  |                           | 12,048 |      |   | 12,048 |  |   | 12,129 | 
| |    | Weighted average shares - Temporary equity                                          |  |                           | -      |      |   | -      |  |   | 496    | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| |    | Weighted
  average number of shares                                                 |  |                           | 12,048 |      |   | 12,048 |  |   | 12,625 | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| |    | Effect of
  dilutive securities:                                                    |  |                           |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| |    | Add - Call option                                                                   |  |                           | -      |      |   | 16     |  |   | 4      | 
| |    | Add - Employee stock options                                                        |  |                           | -      |      |   | 69     |  |   | 332    | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| |    |                                                                                     |  |                           | -      |      |   | 85     |  |   | 336    | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 
| |    | Denominator for diluted net earnings per
  share - adjusted weighted average shares |  |                           | 12,048 |      |   | 12,133 |  |   | 12,961 | 
| |    |                                                                                     |  |                           |        |      |   |        |  |   |        | 

|            |                                                                                                                                                                                                                                                                                                         
|----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 17:   | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                       
|            |                                                                                                                                                                                                                                                                                                         
|            | Grant of options:                                                                                                                                                                                                                                                                                       
|            |                                                                                                                                                                                                                                                                                                         
|            | In January
  2005, the Company granted its Chairman of the Board of Directors 160,961
  options to purchase Common shares at an exercise price of $ 12.11 per share,
  exercisable through August 2011. The options will vest on a quarterly basis
  over three years commencing one year after the IPO.

F-33

---

---

# EXHIBIT INDEX

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



---

---