SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

           [_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                       OR

       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
        EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

                                       OR

     [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD FROM __________ TO __________

                         COMMISSION FILE NUMBER 0-20860

                                 LANOPTICS LTD.
             (Exact name of Registrant as specified in its charter)

                                     ISRAEL
                 (Jurisdiction of incorporation or organization)

                                1 Hatamar Street
                                   PO Box 527
                              Yokneam 20692 Israel
                     (Address of Principal Executive Office)

       SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B)
                                OF THE ACT: None


 SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                     ordinary shares, nominal value NIS 0.02
                                (Title of Class)

 SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D)
                                OF THE ACT: NONE

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: 9,250,535 ordinary shares

<PAGE>

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 [_]

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

                           Item 17 [_]     Item 18 [X]

This Report on Form 20-F is incorporated by reference into the Registrant's Form
F-3 Registration Statements - File Nos. 333-112136 and 333-121611.


                                       2
<PAGE>

<TABLE>
<CAPTION>
                                               TABLE OF CONTENTS
<S>     <C>                <C>                                                                                <C>
PART I                                                                                                         6
        Item 1.            Identity of Directors, Senior Management and Advisors                               6
        Item 2.            Offer Statistics and Expected Timetable                                             6
        Item 3.            Key Information                                                                     7
                           A. Selected Consolidated Financial Data                                             7
                           B. Capitalization and Indebtedness                                                  8
                           C. Reasons for the Offer and Use of Proceeds                                        8
        Item 4             Information On The Company                                                         18
                           A. History and Development of the Company                                          18
                           B. Business Overview                                                               19
                           C. Organizational Structure                                                        31
        Item 5.            Operating and Financial Review and Prospects                                       32
                           A. Results of Operations                                                           36
                           B. Liquidity and Capital Resources                                                 40
                           C. Research and Development, Patents and Licenses                                  42
                           D. Trend Information                                                               42
                           E. Off-Balance Sheet Arrangements                                                  43
                           F. Tabular Disclosure of Contractual Obligations                                   43
        Item 6.            Directors, Senior Management and Employees                                         44
                           A. Directors                                                                       44
                           B. Compensation of Directors and Officers                                          46
                           C. Board Practices                                                                 46
                           D. Employees                                                                       51
                           E. Share Ownership                                                                 52
        Item 7.            Major Shareholders and Related Party Transactions                                  53
                           A. Major Shareholders                                                              53
        Item 8.            Financial Information                                                              54
                           A. Consolidated Statements and Other Financial Information                         54
        Item 9.            Offer and Listing                                                                  55
                           A. Listing Details                                                                 55
        Item 10.           Additional Information                                                             57
                           A. Memorandum and Articles of Association                                          57
        Item 11.           Quantitative and Qualitative Disclosures About Market Risk                         70
        Item 12.           Description of Securities Other Than Equity Securities                             71
</TABLE>


                                       3
<PAGE>

<TABLE>
<CAPTION>
<S>     <C>                <C>                                                                                <C>
PART II                                                                                                       71
        Item 13.           Defaults, Dividend Arrearages and Delinquencies                                    71
        Item 14.           Material Modifications to the Rights of Security Holders and Use of
                           Proceeds                                                                           71
        Item 15.           Controls and Procedures                                                            71
        Item 16.           [Reserved]                                                                         72
        Item 16A.          Audit Committee Financial Expert                                                   72
        Item 16B.          Code of Ethics                                                                     72
        Item 16C.          Principal Accounting Fees and Services                                             72
        Item 16D.          Exemptions from The Listing Requirements and Standards for Audit
                           Committee                                                                          73
        Item 16E.          Purchase of Equity Securities by the Issuer and Affiliates and Purchasers          73

PART III                                                                                                      73
        Item 17.           Financial Statements                                                               73
        Item 18.           Financial Statements                                                               73
        Item 19.           Exhibits                                                                           74

SIGNATURES                                                                                                    75
</TABLE>


                                       4
<PAGE>

                                  INTRODUCTION

LanOptics Ltd. was incorporated as a limited liability company under the laws of
the State of Israel in 1989. Until 1999, our principal business was the
development, manufacturing and marketing of solutions and Internet applications
that improve connectivity and performance of corporate Local Area Networks, or
LANs, and Wide Area Networks, or WANs. Our business now consists of the
development and marketing of high performance network processors through our
independent business unit, E.Z. Chip Technologies Ltd., or EZchip, an Israeli
company in which we currently have a 53.4% ownership interest. As used in this
Annual Report, the terms "we," "us" "our" and the "our company" mean LanOptics
and its EZchip subsidiary taken together, unless otherwise expressly stated. Our
ordinary shares are traded on the Nasdaq SmallCap Market, and on the Tel Aviv
Stock Exchange under the symbol LNOP.

This Annual Report includes certain forward-looking statements with respect to
the business, financial condition and results of operations of our company. The
words "estimate," "project," "intend," "expect" and similar expressions are
intended to identify forward-looking statements within the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those contemplated by such forward-looking statements. Investors are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. We undertake no obligation to publicly release
any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

Our consolidated financial statements appearing in this annual report are
prepared in U.S. dollars and in accordance with generally accepted accounting
principles in the United States, or US GAAP. Commencing January 1, 2004, we
adopted U.S. GAAP for the preparation of our consolidated financial statements.
Previously, our consolidated financial statements were prepared in accordance
with generally accepted accounting principles in Israel, or Israeli GAAP, and
included a note describing the major differences between Israeli GAAP and US
GAAP, as applicable to our company. The consolidated financial statements for
all prior periods presented have been restated and are presented in accordance
with U.S. GAAP.

All references in this Annual Report to "dollars" or "$" are to U.S. dollars and
all references in this annual report to "NIS" are to New Israeli Shekels. The
representative exchange rate between the NIS and the dollar as published by the
Bank of Israel on December 31, 2004 was NIS 4.308 per $1.00.

Statements made in this Annual Report concerning the contents of any contract,
agreement or other document are summaries of such contracts, agreements or
documents and are not complete descriptions of all of their terms. If we filed
any of these documents as an exhibit to this annual report or to any
registration statement or annual report that we previously filed, you may read
the document itself for a complete description of its terms.


                                       5
<PAGE>


                                     PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

                                 Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

                                 Not applicable.


                                       6
<PAGE>

ITEM 3. KEY INFORMATION

A. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data of our company have been
prepared in accordance with US GAAP, and are derived from our audited
consolidated financial statements and accompanying notes. The selected financial
data set forth below should be read in conjunction with and are qualified by
reference to "Item 5. Operating and Financial Review and Prospects", and the
Consolidated Financial Statements included elsewhere in this Annual Report.

Revenues from our legacy networking operations have become immaterial. As a
result, the related assets, liabilities and results of operations for the
reported periods have been reclassified as "discontinued operations". The
reclassification did not result in any changes to our net assets or net income
(loss) for the reported periods.


<TABLE>
<CAPTION>
                                                            2000           2001          2002           2003           2004
                                                          -------         ------        -------        -------         ------
                                                                 (in thousands, except share and per share data)
<S>                                                   <C>            <C>            <C>            <C>            <C>
Statement of operations data:
Revenues                                              $        --    $        --    $       465    $     1,756    $     4,746
Operating loss                                             (6,019)        (9,766)       (14,992)        (9,986)        (8,416)
Loss from continuing operations                            (5,868)        (8,363)       (14,354)       (10,404)        (9,154)
Net loss                                                  (10,637)        (7,570)       (14,303)       (10,404)        (9,154)

Per share data:
Net loss (basic and diluted)                                (1.56)         (1.04)         (1.85)         (1.23)         (0.98)
Net loss from continuing operations (basic and
diluted)                                                   (0.860)         (1.15)         (1.85)         (1.23)         (0.98)
Net profit (loss) from discontinuing operations
(basic and diluted)                                          (0.7)          0.11             --             --             --
Weighted average number of shares used in computing
net earnings (loss) per share                           6,804,043      7,287,715      7,744,593      8,484,120      9,365,181

Balance sheet data:
Working capital                                       $    25,684    $    19,220    $     9,149    $    17,990    $    25,048
Total assets                                               34,568         24,220         15,515         23,965         31,365
Long-term liabilities                                         830            990          1,196          2,919          1,985
Preferred shares of a subsidiary                           25,179         25,179         20,991         32,423         35,789
Shareholders' equity (deficiency)                     $     3,075    $    (4,361)   $    (9,688)   $   (14,320)   $    (9,891)
</TABLE>


                                       7
<PAGE>


EXCHANGE RATE INFORMATION

The following tables sets forth, for the periods and dates indicated, certain
information regarding the Bank of Israel representative rate of exchange for
U.S. dollars, expressed in New Israeli Shekels per dollar.

<TABLE>
<CAPTION>
                                                                      AT PERIOD
PERIOD                                       AVERAGE   HIGH     LOW      END
------                                       ------   -----    -----    -----
<S>                                          <C>      <C>      <C>      <C>
Twelve months ended December 31, 2000        4.077    4.198    3.967    4.041
Twelve months ended December 31, 2001        4.206    4.416    4.067    4.416
Twelve months ended December 31, 2002        4.738    4.994    4.416    4.737
Twelve months ended December 31, 2003        4.548    4.924    4.283    4.379
Twelve months ended December 31, 2004        4.478    4.634    4.308    4.308
</TABLE>

<TABLE>
<CAPTION>
PERIOD                                                    HIGH     LOW
------                                                   -----    -----
<S>                                                      <C>      <C>
DECEMBER 2004                                            4.374    4.308
JANUARY 2005                                             4.414    4.352
FEBRUARY 2005                                            4.392    4.357
MARCH 2004 (AS OF MARCH 30)                              4.379    4.299
</TABLE>

At March 30, 2005, the representative rate of exchange was NIS 4.379 = $1.00, as
published by the Bank of Israel.

B. CAPITALIZATION AND INDEBTEDNESS

                                 Not applicable.

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

                                 Not applicable.


                                       8
<PAGE>


RISK FACTORS

Investing in our ordinary shares involves a high degree of risk and uncertainty.
You should carefully consider the risks and uncertainties described below before
investing in our ordinary shares. Our business, prospects, financial condition
and results of operations could be adversely affected due to any of the
following risks. In that case, the value of our ordinary shares could decline,
and you could lose all or part of your investment.

RISKS RELATING TO OUR BUSINESS

WE HAVE HAD A LIMITED OPERATING HISTORY IN THE NETWORK PROCESSOR INDUSTRY AND
OUR FUTURE FINANCIAL RESULTS ARE DIFFICULT TO PREDICT.

     Our future success will be subject to the risks we will encounter in the
network processor industry. We have a limited operating history in the network
processor industry, with our first product sales in the second quarter of 2002
and total network product sales through December 31, 2004 of approximately $6.97
million. Our limited operating history makes it difficult to evaluate the
prospects of our business. Moreover, the network processor industry is
constantly evolving and is subject to technological and competitive forces
beyond our control. Our ability to design and market products to meet customer
demand and the revenue and income potential of our products and business are
unproven. As an early stage company in the developing network processor
industry, we face numerous risks and uncertainties. Some of these risks relate
to our ability to:

     o    expand and enhance our product offerings;

     o    increase our revenues;

     o    diversify our sources of revenue;

     o    respond to technological changes; and

     o    respond to competitive market conditions.

     If we fail to address these risks and uncertainties, our results of
operations will be adversely affected.

WE ARE DEPENDENT ON THE NETWORKING EQUIPMENT MARKET FOR OUR GROWTH AND IF IT
DOES NOT GROW, THEN WE WILL NOT BE ABLE TO EXPAND OUR BUSINESS.

     The growth of our network processor business depends in part on increased
acceptance and use of networking equipment. In particular, we depend on the
ability of our target customers to develop new products and enhance existing
products for the networking equipment market that incorporate our products and
to introduce and promote their products successfully. The market for networking
equipment depends in part upon the market's acceptance of 10 Gigabit Ethernet
technologies that enable the forwarding of data at a high speed. Ultimately, the
10 Gigabit Ethernet technologies development rate may be slower than we
anticipate. If the use of networking equipment does not grow as we anticipate,
if our target customers do not incorporate our products into theirs, or if the
products of our target customers that incorporate our network processors are not
commercially successful, our growth will be impeded.


                                       9
<PAGE>


MANY OF OUR COMPETITORS AND POTENTIAL COMPETITORS ARE MUCH LARGER THAN US AND IF
WE ARE UNABLE TO COMPETE EFFECTIVELY, WE COULD LOSE OUR MARKET SHARE AND
REVENUES.

     The market for network processors is intensely competitive, rapidly
evolving and subject to rapid technological change. We believe that competition
in this market will become more intense in the future and may cause price
reductions, reduce gross margins and result in loss of market share, any one of
which could significantly reduce our future revenue and increase our losses.
Many of our current and potential competitors have longer operating histories,
significantly greater financial, technical, product development and marketing
resources, greater name recognition and significantly larger customer bases than
we do.

     Additionally, many of our competitors also have well-established
relationships with our prospective customers and suppliers. As a result of these
factors, many of our competitors, either alone or with other companies, have
significant influence in our target markets that could outweigh our
technological advantage.

OUR PRODUCTS MAY HAVE DEFECTS, WHICH COULD DAMAGE OUR REPUTATION, DECREASE
MARKET ACCEPTANCE OF OUR PRODUCTS, CAUSE US TO LOSE CUSTOMERS AND REVENUE,
INCREASE PRODUCTION COSTS AND RESULT IN LIABILITY.

     Highly complex products such as network processors may contain hardware or
software defects or bugs. Often, these defects and bugs are not detected until
after the products have been shipped. If any of our products contain defects, or
have reliability, quality or compatibility problems, our reputation might be
damaged significantly and customers might be reluctant to buy our products,
which could result in the loss of or failure to attract customers. In addition,
these defects could interrupt or delay sales. We may have to invest significant
capital and other resources to correct these problems. If any of these problems
are not found until after we have commenced commercial production of a new
product, we might incur substantial additional development costs. If we fail to
provide solutions to the problems, such as software upgrades or patches, we
could also incur product recall, repair or replacement costs. These problems
might also result in claims against us by our customers or others. In addition,
these problems might divert technical and other resources from other development
efforts. Moreover, we would likely lose, or experience a delay in, market
acceptance of the affected product or products, and we could lose credibility
with our current and prospective customers. This is particularly significant as
we are relatively a new entrant to a market dominated by large, well-established
companies.

WE MAY HAVE TO REDESIGN OUR PRODUCTS TO MEET RAPIDLY EVOLVING INDUSTRY STANDARDS
AND CUSTOMER SPECIFICATIONS, WHICH COULD DELAY OUR PRODUCTION AND INCREASE OUR
OPERATING COSTS.

     We operate in a market characterized by rapidly evolving industry
standards, product obsolescence, and new manufacturing and design technologies.
Many of the standards and protocols for our products are based on high speed
networking technologies that have not been widely adopted or ratified by one of
the standard setting bodies in our customers' industry.

     Our target customers, network equipment manufacturers, are likely to have
varying requirements and may delay or alter their design demands during this
standard-setting process. In response, we may have to redesign our products to
suit these changing demands, which would likely delay the production of our
future products and increase operating costs.


                                       10
<PAGE>

BECAUSE OUR PRODUCTS HAVE LENGTHY DESIGN AND DEVELOPMENT CYCLES, WE COULD
EXPERIENCE DELAYS IN GENERATING REVENUES OR CANCELLATION OF CUSTOMER CONTRACTS.

     We may never generate significant revenues from our products after
incurring significant design and development expenditures. A customer may decide
to cancel or change its product plans, which could cause us to generate no
revenue from that customer and adversely affect our results of operations. A
delay or cancellation of a customer's plans could significantly adversely affect
our financial results. Even after winning a design contract, a customer may not
begin volume production of our equipment for a period of up to two years, if at
all. Due to this lengthy design and development cycle, a significant period may
elapse from the time we begin incurring expenses until the time we generate
revenue from our products. We have no assurances that our customers will
ultimately market and sell our equipment or that such efforts by our customers
will be successful.

THE LOSS OF PERSONNEL COULD AFFECT OUR ABILITY TO DESIGN AND MARKET OUR
PRODUCTS.

     To succeed, we must retain and hire technical personnel highly skilled at
the design and test functions used to develop high speed networking products and
related software. The competition for such employees is intense. We, along with
our competitors, customers and other companies in the communications industry,
face intense competition for those employees from competitors and an increasing
number of startup companies which are emerging with potentially lucrative
employee ownership arrangements. Recruiting, hiring and retaining key personnel
can also result in significant monetary costs.

IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR TECHNOLOGY OR OTHER INTELLECTUAL
PROPERTY THROUGH PATENTS, COPYRIGHTS, TRADE SECRETS, TRADEMARKS AND OTHER
MEASURES, OUR COMPETITORS COULD USE OUR PROPRIETARY INFORMATION AND WE COULD
LOSE OUR COMPETITIVE ADVANTAGE.

     To compete effectively, we must protect our proprietary information. We
rely on and intend to rely on a combination of patents, trademarks, trade secret
laws, confidentiality procedures and licensing arrangements to protect our
intellectual property rights. Our failure to adequately protect our technology
or other intellectual property from use by our competitors could jeopardize our
competitive advantage, and result in a loss of customers. We have a number of
issued patents, however, the patents that have been issued may not provide any
meaningful protection or commercial advantage to us, as they may not be of
sufficient scope or strength, or may not be issued in all countries where our
products can be sold. In addition, our competitors may be able to design around
our patents.

OUR PRODUCTS EMPLOY TECHNOLOGIES THAT MAY INFRINGE ON THE PROPRIETARY RIGHTS OF
THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION AND PREVENT US FROM SELLING OUR
PRODUCTS.

     Vigorous protection and pursuit of intellectual property rights or
positions characterize the semiconductor industry. This often results in
expensive and lengthy litigation. We, as well as our customers or suppliers, may
be accused of infringing on patents or other intellectual property rights owned
by third parties. An adverse result in any litigation could force us to pay
substantial damages, stop designing or manufacturing, using and selling the
infringing products, spend significant resources to develop non-infringing
technology, discontinue using certain processes or obtain licenses to use the
infringing technology. In addition, we may not be able to develop non-infringing
technology, nor might we be able to find appropriate licenses on reasonably
satisfactory terms.


                                       11
<PAGE>


BECAUSE THE PROCESSES USED TO MANUFACTURE OUR PRODUCTS ARE COMPLEX, CUSTOMIZED
TO OUR SPECIFICATIONS AND CAN ONLY BE PERFORMED BY A LIMITED NUMBER OF
MANUFACTURING FACILITIES, WE MAY EXPERIENCE DELAYS IN PRODUCTION AND INCREASED
COSTS.

     The manufacture of processors is a highly complex and technically demanding
process. Defects in design or problems associated with transitions to newer
manufacturing processes or new manufacturers can result in unacceptable
manufacturing yields and performance. These problems are frequently difficult to
detect in the early stages of the production process and can be time-consuming
and expensive to correct once detected. As a result, defects, performance
problems with our products or poor manufacturing yields could adversely affect
our business and operating results.

WE DEPEND ON THIRD-PARTY MANUFACTURERS AND OTHER SUPPLIERS TO MANUFACTURE OUR
NETWORK PROCESSORS.

     The fabrication of our network processors is outsourced to third-party
manufacturers and subcontractors. There are significant risks associated with
our reliance on third-party manufacturers. Most significantly, if our
manufacturing suppliers are unable or unwilling to provide us with adequate
manufacturing capacity, we would have to identify and qualify one or more
substitute suppliers for our products. Our manufacturers may experience
unanticipated events that could inhibit their abilities to provide us with
adequate manufacturing capacity on a timely basis, or at all. Historically,
there have been periods in which there has been a worldwide shortage of
manufacturer capacity for the production of high-performance processors such as
ours. Introducing new products or transferring existing products to a new third
party manufacturer would require significant development time to adapt our
designs to their manufacturing processes and could cause product shipment
delays. In addition, the costs associated with manufacturing our products may
increase if we are required to use a new third party manufacturer. If we fail to
satisfy our manufacturing requirements, our business would be materially harmed.

     Under a November 2000 agreement, as amended, IBM agreed to manufacture our
NP-1 and NP-1c network processors and related prototypes until December 31,
2007. Under the agreement's terms, IBM may reduce or delay shipment if its
ability to manufacture the NP-1 and NP-1c network processors is constrained. IBM
is the sole manufacturer of the NP-1 and NP-1c network processors. If IBM fails
to deliver network processors on time or at all, our business could be severely
harmed. If the arrangement with IBM is terminated or amended in a manner
detrimental to us, it could adversely affect our business while we try to locate
a substitute supplier.

     We have entered into arrangements with respect to the manufacture of our
NP-2 network processor, which will entail similar risks. Unlike the arrangement
relating to the manufacture of our NP-1 and NP-1c network processors, a portion
of the pre-manufacturing process of the NP-2 network processor will be performed
by a subcontractor other than the manufacturer. Reliance on an additional third
party, and the interaction between this subcontractor and the manufacturer, may
result in unforeseen difficulties or delays in the manufacturing process.

     These and other risks associated with our reliance on a third-party
manufacturer could materially and adversely affect our business, financial
condition and results of operations.


                                       12
<PAGE>

IF INTERNALLY GENERATED FUNDS ARE INSUFFICIENT AND WE ARE UNABLE TO PROCURE
FUNDING ON FAVORABLE TERMS, WE WOULD NOT BE ABLE TO DEVELOP AND EXPAND OUR
BUSINESS, WHICH COULD NEGATIVELY AFFECT OUR REVENUES.

     We expect that significant funding will be required in order to continue to
develop our products and to expand our business. Given the state of development
of our products and the present economic environment, we believe that we have
sufficient funding resources to finance our operations through the end of 2006.
The capital markets have experienced severe downturns over the last couple of
years, especially relating to technology companies, and access to capital has at
times been both difficult and expensive. If internally generated funds are
insufficient and we do not obtain enough funding to support our future
development when needed, our business will suffer. Even if we are successful in
obtaining funding through the capital markets or otherwise, such funding may not
be on terms favorable to us.

YOUR OWNERSHIP INTEREST IN LANOPTICS MAY BE DILUTED AS A RESULT OF ANTICIPATED
EXCHANGES OF OUR SHARES FOR EZCHIP SHARES.

     We presently own approximately 53.4% of EZchip. We wish to exchange our
shares from time to time for EZchip shares in order to increase our ownership
interest in EZchip. We will attempt to effect all such exchanges at an exchange
ratio that reflects the relative values of LanOptics and EZchip. If we are
required to issue more LanOptics shares than the number that reflects our value
relative to the value of EZchip, the ownership interests of LanOptics existing
shareholders will be diluted.

THE LIQUIDATION PREFERENCE OF THE PREFERRED SHAREHOLDERS OF EZCHIP MAY LIMIT
LANOPTICS' RETURN IN THE EVENT OF A SALE OF EZCHIP

     We hold both ordinary shares and various classes of preferred shares in
EZchip. Most of the other shareholders of EZchip hold preferred shares that
provide the holders with preferences upon liquidation. If EZchip were to be
sold, the transaction would likely be a deemed liquidation that would entitle
the preferred shareholders to their liquidation preference before any
distribution to the holders of ordinary shares. This may result in those
shareholders receiving a higher percentage in liquidation than their actual
ownership percentage. Any voluntary liquidation event would require the approval
of our board of directors.


                                       13
<PAGE>

OUR SHARE PRICE HAS BEEN VOLATILE AND WE BELIEVE THAT IT IS LIKELY TO CONTINUE
TO BE VOLATILE.

     The market price of our ordinary shares has been highly volatile and we
believe that it is likely to continue to be volatile. This is due to the risks
and uncertainties described in this annual report, as well as other factors,
including:

     o    general economic conditions, including those that specifically relate
          to network processor and telecom industries;

     o    actual or anticipated fluctuations in our operating results;

     o    changes in expectations as to our future financial performance;

     o    the issuance of research reports about our company or industry, or
          changes in analysts' opinions about our company;

     o    technological innovations by us or by our competitors;

     o    investors' perceptions about the future of the telecom industry or
          changes in market valuation of network processor companies in
          particular;

     o    relatively low volumes at which our shares have been traded at in the
          past and at which they may continue to trade; and

     o    the operating and share price performance of comparable companies.

     In addition, the market prices of equity securities of companies that have
a significant presence in Israel may also be affected by the changing security
situation in the Middle East and particularly in Israel. As a result, these
companies may experience difficulties in raising additional financing required
to effectively operate and grow their businesses. Such failure and the
volatility of the securities market in general, and our share price in
particular, may affect our ability to raise additional financing in the future.
Market and industry fluctuations may adversely affect the trading price of our
ordinary shares, regardless of our actual operating performance.

THE IMPLEMENTATION OF SFAS NO. 123R, WHICH REQUIRED US TO RECORD COMPENSATION
EXPENSE IN CONNECTION WITH EQUITY SHARE BASED COMPENSATION, WOULD REDUCE OUR
PROFITABILITY SIGNIFICANTLY.

     On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued Statement No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123R"),
which is a revision of SFAS No. 123. Generally, the approach in SFAS 123(R) is
similar to the approach described in Statement 123. However, SFAS No. 123
permitted, but did not require, share-based payments to employees to be
recognized based on their fair values while SFAS No. 123(R) requires, as to
accounting periods starting after June 15, 2005, that all share-based payments
to employees be recognized based on their fair values. SFAS No. 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 adoption of SFAS No. 123R will have
a significant effect on our results of operations in the future. In addition,
such adoption could also limit our ability to use stock options as an incentive
and retention tool, which could, in turn, hurt our ability to recruit employees
and retain existing employees.


                                       14
<PAGE>


FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN THE UNITED STATES DOLLAR AND FOREIGN
CURRENCIES MAY AFFECT OUR OPERATING RESULTS.

     A significant portion of the cost of our Israeli operations, mainly
personnel and facility-related, is incurred in NIS. Therefore, our NIS related
costs, as expressed in US dollars, are influenced by the exchange rate between
the US dollar and the NIS. In addition, if the rate of inflation in Israel will
exceed the rate of devaluation of the NIS in relation to the US dollar, or if
the timing of such devaluations were to lag considerably behind inflation, our
cost as expressed in US dollars may increase. NIS linked balance sheet items may
create foreign exchange gains or losses, depending upon the relative dollar
values of the NIS at the beginning and end of the reporting period, affecting
our net income and earnings per share. Although we may use hedging techniques we
may not be able to eliminate the effects of currency fluctuations. Thus,
exchange rate fluctuations could have a material adverse impact on our operating
results and share price.

COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.

     Changing laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbane-Oxley Act of 2002, new Securities
and Exchange Commission regulations and Nasdaq Stock Market rules, are creating
uncertainty for companies such as ours. We are committed to maintaining high
standards of corporate governance and public disclosure. As a result, we intend
to invest reasonably necessary resources to comply with evolving standards, and
this investment may result in increased general and administrative expenses and
a diversion of management time and attention from revenue-generating activities
to compliance activities, which could harm our operating results and business
prospects.


                                       15
<PAGE>

RISKS RELATING TO OUR LOCATION IN ISRAEL

POTENTIAL POLITICAL, ECONOMIC AND MILITARY INSTABILITY IN ISRAEL MAY DISRUPT OUR
OPERATIONS AND NEGATIVELY AFFECT OUR SALES.

     We are organized under the laws of the State of Israel and a substantial
portion of our assets, and our principal operations, are located in Israel.
Consequently, our operations, financial condition and results of operations are
directly influenced by economic, political and military conditions in and
affecting Israel. Our operations could be adversely affected if major
hostilities break out in the Middle East or if trade between Israel and its
present trading partners is curtailed.

     Since the establishment of the State of Israel in 1948, a state of
hostility has existed between Israel and the Arab countries in the region. Peace
talks between Israel and the Palestinian Authority began in the early 1990s, but
they broke down in mid-2000 and have only recently resumed. Attacks on Israel by
Palestinian terrorists, and military responses by Israel, have accelerated
considerably since late 2000. We cannot predict whether or when a peace process
will resume, whether a full resolution of these problems will be achieved, the
nature of any such resolution or any consequences that any of these factors may
have on us. Any future armed conflicts or political instability in the region
could negatively affect our business or harm our results of operations.

     Additionally, some of our key employees in Israel are obligated to perform
annual reserve duty in the Israel Defense Forces and are subject to being called
for active military duty at any time in the event of a national emergency. Our
operations could be disrupted by the absence for a significant period of one or
more of our key employees due to military service. Any disruption in our
operations would harm our business.

CHANGES TO TAX LAWS MAY RESULT IN OUR RECEIVING FEWER BENEFITS THAN WE HOPE TO
RECEIVE.

     In the past, we received tax benefits under Israeli law for capital
investments in facilities and equipment that are designated as "approved
enterprises." We expect to receive these benefits in the future when EZchip
attains volume sales levels and becomes profitable. To maintain our eligibility
for these tax benefits, we must continue to meet several conditions including
making certain required investments in fixed assets. From time to time, we may
submit requests for expansion of our Approved Enterprise programs or for new
programs. These requests might not be approved. The law and regulations
prescribing the benefits provide for an expiration date for the grant of new
benefits. The expiration date has been extended several times in the past. The
expiration date currently in effect is March 31, 2005 (which may be extended by
ministerial decision until June 30, 2005) and no new benefits will be granted
after that date unless the expiration date is again extended. There can be no
assurance that new benefits will be available after March 31, 2005, or that
existing benefits will be continued in the future in their current level or at
any level. Various proposals have been put forth for new legislation to replace
the law prescribing these benefits. We are not able to predict whether or when
this new legislation will be enacted, nor can we predict the nature and scope of
benefits that may be available under any new law. The termination or reduction
of certain programs and tax benefits (particularly benefits available to us as a
result of the approved enterprise status of our facilities and programs) could
have a material adverse effect on our future business, operating results and
financial condition.


                                       16
<PAGE>


IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US OR OUR OFFICERS AND
DIRECTORS, TO ASSERT U.S. SECURITIES LAWS CLAIMS IN ISRAEL OR SERVE PROCESS ON
SUBSTANTIALLY ALL OF OUR OFFICERS AND DIRECTORS.

     We are organized under the laws of the State of Israel. Substantially all
of our executive officers and directors and a substantial portion of our assets
and the assets of these persons are located outside the United States.
Therefore, it may be difficult for an investor, or any other person or entity,
to collect a judgment obtained in the United States against us or any of these
persons, or to effect service of process upon these persons in the United
States.

THE RIGHTS AND RESPONSIBILITIES OF OUR SHAREHOLDERS ARE GOVERNED BY ISRAELI LAW
AND DIFFER IN SOME RESPECTS FROM THE RIGHTS AND RESPONSIBILITIES OF SHAREHOLDERS
UNDER U.S. LAW.

     We are incorporated under Israeli law. The rights and responsibilities of
holders of our ordinary shares are governed by our articles of association and
by Israeli law. These rights and responsibilities differ in some respects from
the rights and responsibilities of shareholders in typical U.S. corporations. In
particular, a shareholder of an Israeli company has a duty to act in good faith
toward the company and other shareholders and to refrain from abusing his power
in the company, including, among other things, in voting at the general meeting
of shareholders on certain matters. Israeli law provides that these duties are
applicable in shareholder votes on, among other things, amendments to a
company's articles of association, increases in a company's authorized share
capital, mergers and interested party transactions requiring shareholder
approval. In addition, a shareholder who knows that it possesses the power to
determine the outcome of a shareholder vote or to appoint or prevent the
appointment of a director or executive officer in the company has a duty of
fairness toward the company. A recent amendment to the Israeli Companies Law
provides that a breach of the duty of fairness will be governed by the laws
governing breach of contract. However, Israeli law does not define the substance
of this duty of fairness. Because Israeli corporate law has undergone extensive
revision in recent years, there is little case law available to assist in
understanding the implications of these provisions that govern shareholder
behavior.

PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE DIFFICULT A CHANGE OF
CONTROL AND THEREFORE DEPRESS THE PRICE OF OUR SHARES.

     Some of the provisions of Israeli law could:

     o    discourage potential acquisition proposals;

     o    delay or prevent a change in control; and

     o    limit the price that investors might be willing to pay in the future
          for our ordinary shares.

     Israeli corporate law regulates mergers and acquisitions of shares through
tender offers, requires approvals for transactions involving significant
shareholders and regulates other matters that may be relevant to these types of
transactions. Furthermore, Israel tax law treats stock-for-stock acquisitions
between an Israeli company and a foreign company less favorably than does U.S.
tax law. For example, Israeli tax law may subject a shareholder who exchanges
his ordinary shares for shares in a foreign corporation to immediate taxation or
to taxation before his investment in the foreign corporation becomes liquid.
These provisions may adversely affect the price of our shares.



                                       17
<PAGE>


ITEM 4. INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF THE COMPANY

     We were incorporated as a limited liability company under the laws of the
State of Israel in 1989. Until 1999, our principal business was the development,
manufacturing and marketing of solutions and Internet applications that improve
connectivity and performance of corporate LANs and WANs. Our business now
consists of the development and marketing of high performance network processors
through our independent business unit, E.Z. Chip Technologies Ltd., or EZchip,
in which we currently have a 53.4% ownership interest. Our principal executive
offices are located at 1 Hatamar Street, P.O. Box 527, Yokneam 20692 Israel, and
our telephone number is +972-4-959-6666. Puglisi & Associates, located at 859
Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware 19715, serves as our
agent for service of process.

     Our business initially consisted of developing, marketing and producing LAN
equipment, such as hubs and switches, based on the Token Ring protocol.
Beginning in 1995, the Ethernet protocol became increasingly dominant in the LAN
market. Products based on the Token Ring protocol, which formed the core of our
business, suffered from declining market share. In response to the changing
market environment, we started to develop Ethernet protocol-based LAN products.
In addition, we started new business initiatives in areas different from our
core business. One of these businesses, which in 1996 we incorporated as
NetXchange, operated in the fax over Internet Protocol market. We decided to
cease the operations of NetXchange in 1998, after sustaining significant losses.
In 1997 we incorporated NetGuard Ltd., which provided Internet security
solutions. During the first quarter of 2001, we closed the operations of
NetGuard Ltd. Our sales levels for the legacy networking products have become
immaterial. As a result, the related assets, liabilities and results of
operations for the reported periods were reclassified as "discontinued
operations. The reclassification did not result in any changes to our net assets
or net income (loss) for the reported periods

     In mid-1999 we decided to cease the research and development of new
switching products for LANs and instead focus on our internal
application-specific integrated circuit, or ASIC, design team. This team, that
had previously developed ASICs for our products, began work on the development
of network processors. This new business initiative was incorporated as our
EZchip subsidiary in December 1999.

     Through EZchip, we are developing high-performance network processors for
high speed networking equipment. EZchip's technology enables complex packet
processing without any noticeable degradation in speed. EZchip's solutions
enable networking vendors to build powerful products quickly and cost
effectively. EZchip's initial product, the NP-1, a 10-Gigabit, seven-layer
network processor, began shipping to customers in April 2002. EZchip
second-generation network processor, an enhancement to its NP-1 product, has
been commercially available since December 2003. In March 2004, EZchip announced
its third-generation network processor, dubbed NP-2, which is an enhanced
10-Gigabit network processor offering integrated traffic management. The NP-2 is
expected to be available to customers in early 2006.


                                       18
<PAGE>


B. BUSINESS OVERVIEW

THE NETWORK PROCESSOR INDUSTRY

BACKGROUND

     The Internet is creating strong demand for bandwidth. The increases that
have been achieved in bandwidth have not kept pace with the exponential growth
in the amount of data that is transmitted over networks. All available bandwidth
is often occupied at peak hours, with the result that critical operations are
buffered and remain in a queue. The lack of available bandwidth is especially
problematic in mission critical applications that require real-time,
high-quality transmission of data, such as voice over IP telephony, multi-media
applications and video conferencing. Various techniques are available to deal
with the overload, including "quality of service" approaches (which combine
bandwidth control with load balancing applications) and policy-based management
of data traffic.

     The existing solutions are inadequate and fraught with difficulties. Some
of these solutions rely on products that incorporate standard microprocessors,
which are effective but which slow down high-speed environments such as Gigabit
Ethernet or Terabit Ethernet to an unacceptable extent. Other solutions use
application specific integrated circuits that are effective from a performance
and speed viewpoint, but which are too inflexible for today's rapidly changing
application environment. These application specific integrated circuits need to
be re-designed to deal with changes in the applications.

     Network processors are programmable integrated circuits that combine the
speed advantages of silicon chips with the intelligence and flexibility of
microprocessors. They can accommodate new Internet and intranet applications,
and new protocols, simply by downloading new or updated software. This
combination of performance, speed and flexibility allows equipment suppliers to
keep pace with changes and extend the lifespan of their products.

MARKET TRENDS

     Most existing network processors are designed primarily by the integration
of several RISC (reduced instruction set computing) processors onto a single
silicon chip. These combined processors are limited in their speed to
approximately 1 to 2 Gigabits per second at certain layers (there are 7 layers
in every data transmission as defined by the OSI model), far too slow for the 10
Gigabit networks and advanced services that are currently being designed.

     We expect the developments in the market for data network equipment to lead
to four significant changes:

     o    MIGRATION TO GIGABIT ETHERNET AND 10-GIGABIT ETHERNET. The growth in
          demand for bandwidth has led to efforts to accelerate the speed at
          which data traffic is transmitted. Technology is currently available
          that allows the existing wiring in most local area networks to carry
          Gigabit Ethernet traffic. Although Ethernet is the de facto standard
          in internal, local area networks, most broader networks use other
          standards such as SONET (synchronous optical network), SDH
          (synchronous digital hierarchy) or ATM (asynchronous transfer mode).
          We believe that the introduction of 10-Gigabit-per-second Ethernet
          will make this an economically and technologically attractive
          alternative, and will lead to the adoption of the Ethernet standard in
          wide area networks and metropolitan area networks.


                                       19
<PAGE>


     o    ADOPTION OF MERCHANT SILICON. Traditionally, networking equipment
          suppliers built a host of functions into their routers and switches.
          With greater competition and pressure to bring products to market
          quickly, however, these suppliers are increasingly turning to merchant
          silicon - standard, off-the-shelf semiconductors that can accommodate
          a broad variety of applications - to provide the basic switching
          functionality. Most of the leading suppliers, such as 3Com
          Corporation, Huawei Technologies, Lucent Technologies Inc. and Nortel
          Networks Corporation, are integrating merchant silicon into their
          products.

     o    TREND TOWARD NETWORK PROCESSORS. Communications equipment vendors are
          adopting network processors because of the advantages they offer in
          terms of long-term flexibility, reduced time to market and lower
          costs. Network processors offer communications equipment vendors all
          of the benefits of merchant silicon, but also allow them to add
          features by means of proprietary software. The equipment suppliers are
          pioneering software-driven advanced features to differentiate their
          products from the competition. As network processors are adopted,
          fabless semiconductor companies will supply the "switch on a chip"
          that forms the backbone of networking equipment.

     o    DEMAND FOR SEVEN-LAYER SWITCHING. The need to cope with overloaded
          data networks and provide consistent, predictable delivery of data
          even during periods of congestion has led to the adoption of a variety
          of tools that incorporate policy-based traffic management. In order to
          provide true quality of service, these tools need to be able to
          inspect the data in all of the payload (in all seven layers) of every
          data transmission. To do so, they can use microprocessors, application
          specific integrated circuits, general-purpose network processors or
          task-optimized network processors. Microprocessors cannot keep up with
          high-speed networks, while application specific integrated circuits
          are inflexible and cannot be adapted to subsequently developed
          applications. General-purpose network processors overcome these
          obstacles, but they are limited in performance. Task optimized network
          processors use different processors; each tailored to perform a
          specific network function and then integrated to process data without
          any degradation in speed or performance.


                                       20
<PAGE>


OUR SOLUTION

     We design and produce task-optimized network processors for high-speed
networking equipment. We are a fabless semiconductor company, which means that
we do not have our own semiconductor manufacturing plant but rather, we utilize
outside fabrication facilities. Our first product, which was introduced in April
2002, is the NP-1, a merchant silicon network processor that forms the core of a
seven-layer, 10-Gigabit networking equipment. Although a couple of customers
still have product designs based on our first chip, the NP-1, most customers
today are using the NP-1c for their EZchip-based products. The NP-1c, an
improved and less expensive version of the NP-1, which uses a 0.11-micron chip
manufacturing process has been commercially available since December 2003. The
NP-1c's design is compatible with the NP-1, so that our NP-1 customers that have
completed design and testing with the NP-1 have migrated to the NP-1c for volume
production. In January 2003, we introduced a 10-Gigabit traffic manager, the
QX-1, which complements the NP-1/NP-1c network processors for added traffic
management functionality and expands its quality of service features. This
traffic management functionality is also being integrated into our newest
network processor product line - the NP-2 Network Processors family. The NP-2 is
based on the same network processing core technology as the NP-1c, with the
addition of traffic management functionality onto a single chip. By combining
both the network processing and traffic management functions, generally
performed by two separate chips, onto a single chip we hope to offer customers
an even more integrated and cost effective solution. The NP-2 family was
announced in March 2004 and is scheduled to be available to customers in early
2006. We assume that by 2006 a majority of our new customers will be designing
system based on the NP-2, as opposed to the NP-1c. The architecture and features
of these products offer the flexibility, scalability and price performance that
are sought by communications equipment vendors. Networking equipment vendors use
EZchip's network processors to form the silicon core of next-generation
networking equipment, such as switches and routers, for voice, video and data
integration in a variety of applications.


                                       21
<PAGE>


PRODUCTS

     We introduced the NP-1 network processor in April 2002. The NP-1 is a
single-chip, full-duplex, 10-Gigabit, seven-layer network processor. We believe
that the NP-1 is the first network processor with these features and with
integrated classifiers on the market. It provides fully programmable packet
classification, modification, forwarding and queuing/policing at network speed.
This enables the design of networking equipment with extremely fast performance
and port density. NP-1 based platforms can be programmed to deliver switching,
routing, MPLS, and Quality of Service (QoS) with advanced services such as
flow-based traffic policing, URL switching, security and usage-based accounting.

     Our network processors are single-chip solutions that enable our customers
to design high-density, multi-port line cards. The NP-1 includes classification
engines, embedded memory and media access controllers (MACs) thus reducing the
number of complementary chips required. This high level of integration benefits
the networking vendors by reducing the system price, complexity and real estate
(that is, the amount of space required on board).

     Continuing with our development of highly integrated products, in December
2003 we introduced the NP-1c network processor. Like the NP-1, the NP-1c is a
single-chip, full-duplex, 10-Gigabit, seven-layer network processor that
integrates search engines, yet it offers a significant increases in performance
and cost reduction due to its improved process technology. NP-1c is essentially
a less expensive version of the NP-1 that uses a 0.11-micron chip manufacturing
process. The NP-1c's design is compatible with the NP-1, so that our customers
could perform design and testing with the NP-1 and then migrate to the NP-1c for
volume production.

     The QX-1, a 10-Gigabit traffic manager was introduced in January 2003. The
QX-1 is an optional chip that complements the NP-1 by expanding its quality of
service features. Since traffic management functionality will be integrated into
the upcoming NP-2, the QX-1 will become obsolete.


                                       22
<PAGE>


EVALUATION BOARDS AND NETWORK-PROCESSOR BASED SYSTEMS

     In April 2002, with the arrival of the first NP-1 processors, we began
delivering evaluation boards to customers, to enable them to test their NP-1
based systems. Evaluation boards for NP-1 are available with three different
interfaces: eight ports of 1-Gigabit Ethernet, one 10-Gigabit Ethernet port or
one OC-192 port for Packet Over SONET (POS). Evaluation boards for the NP-1c are
available with two different interfaces: ten ports of 1-Gigabit Ethernet or one
10-Gigabit Ethernet port.

     Although our primary business is selling network processor chips, we offer
two systems based on the NP-1c network processor. These systems serve both as
evaluation systems for our customers, or prospective customers, to assess an
NP-1c based system as well as systems that our customers may adapt and
differentiate and then market as their own products. In November 2003, we
announced a new evaluation system for the NP-1c network processor. The system is
compliant with the new Advanced Telecommunications Computing Architecture
(AdvancedTCA(R)) and is provided as a blade that can be plugged into an
AdvancedTCA chassis or as a stand-alone, self-contained box. The EZchip board
enables ten network-processor driven 1-Gigabit ports on a single AdvancedTCA
board. AdvancedTCA is the PCI Industrial Computer Manufacturers Group (PICMG)
specifications for Advanced Telecommunications Computing Architecture and forms
the basis for standard compliant hardware for next generation telecommunications
equipment. The compact NP-1c AdvancedTCA evaluation board features ten 1-Gigabit
Ethernet ports and a complete data plane and control plane solution. The NP-1c
provides 10-Gigabit data plane processing and classifying while a PrPMC
mezzanine card provides control plane processing. A comprehensive software
environment with support for the Linux(R) and Wind River VxWorks(R) operating
systems is provided.

     In April 2004, we developed an additional system with hardware and software
based on the NP-1c, named EZsystem. EZsystem is a stand-alone, self-contained
box with ten 1-Gigabit ports that can be tailored by software vendors to a wide
variety of networking applications. Such applications may include firewall,
intrusion detection, load balancing, network management, Voice Over Internet
Protocol gateways, content inspection and traffic analysis. EZsystem utilizes
the NP-1c to accelerate software solutions that typically run on available
off-the-shelf PC based hardware or proprietary hardware platforms. Through
programming of the EZsystem, software vendors can deliver high performance
applications without requiring any hardware design on their part. EZsystem is
provided with a comprehensive software environment and support for the Linux(R)
and Wind River VxWorks(R) operating systems.


                                       23
<PAGE>

DEVELOPMENT SOFTWARE TOOLKITS

     In order to facilitate our customers' adaptation of our products, we offer
toolkits that assist our customers in creating, verifying and implementing
solutions based on our network processors. These toolkits are used for
customers' product development based on all of our network processors models:
NP-1, NP-1c and NP-2. We have released software versions supporting the NP-2
network processor that enable customers to begin their designs based on this
network processor before its silicon is actually available.

     We released the first toolkit, EZdesign, in January 2001. It is a
comprehensive software development toolset with a graphical user interface (GUI)
for writing, testing and debugging programs for our network processors to
implement a wide range of applications and reduce time to market of
next-generation networking products. It includes a hardware-software simulator,
a library of pre-coded subroutines, a high-level language compiler and a
functional tester. We continuously release new versions of the EZdesign toolset,
providing functional enhancements.

     EZdriver is a toolset that facilitates the development of the control path
software for EZchip-based systems. It enables applications that run on the
control CPU to communicate with our network processors. EZdriver consists of
routines that execute on the control CPU and provide an application program
interface (API) to the network processor. It includes network processor
configuration, microcode loading, creation and maintenance of network-processor
lookup structures, sending and receiving frames to and from the network
processor, as well as configuration and access to the network-processor
statistics block.

     EZdriver along with EZdesign provide extensive debugging capabilities, and
enable software-driven debugging features (e.g. breakpoints, single step,
register and memory access) to be performed on both the network processor
simulator and the actual chip.

     To assist our customers in their application development, EZchip also
provides customers with a broad library featuring tested source code for a wide
range of applications. These include MPLS, VPLS and Draft Martini, IPv4 and IPv6
routing, ACL (Access Control Lists), Network Address Translation, Server Load
Balancing and URL filtering. New code is periodically added to this library.


                                       24
<PAGE>


FUTURE PRODUCTS

     We are developing the NP-2 product line, a 10-Gigabit, high performance
network processors based on the uniquely scalable architecture of the NP-1c. The
two chips use the same simple programming model and are software compatible. In
addition to the integration of packet processing, classification search engines
and MACs currently available in the NP-1c, the NP-2 will also add two traffic
managers for improved quality of service. Since the traffic management function
is generally performed by complementary chips, by integrating it directly into
the network processor, we hope to provide our customers with a cost-effective
network processing solution that reduces power dissipation and system design
costs. The NP-2 network processor is planned to be available in several models
for different speeds and feature sets, which will enable the NP-2 to position
itself in network processor market segments not reached by the NP-1 and NP-1c.
Since all the NP-2 models are software and pin compatible, customers may modify
their NP-2 designs using the different NP-2 models to offer a range of products
at differing price points. The NP-2 product family is compatible with the NP-1c
making it possible for existing customers to migrate to NP-2.

     Whereas the NP-1c is targeted mainly at service cards in communication
applications with typically one or two of these cards per chassis, the NP-2 will
address line card applications, which often have ten or more cards installed per
chassis, and stand-alone "pizza" box applications. We hope to increase our
market share by expanding into this additional market segment.

     We have several customers that are currently designing products based on
the NP-2 using our design toolkits. The NP-2 network processor is expected to be
available to customers in early 2006. Once the silicon is available, we will
make evaluation systems based on the NP-2 available to our customers.

TECHNOLOGY

     In general, a network processor is a programmable integrated circuit used
in data communications that is capable of performing one or more of the
following functions: packet classification (that is, identifying a packet of
data based on known characteristics such as address or protocol), packet
modification (that is, modifying the packet to comply with specified protocols),
queue/policy management (that is, reflecting the organization and prioritization
of the processing of specific packets), and packet forwarding (that is,
transmission and receipt of data and forwarding or routing the packet to the
appropriate address). To perform these functions requires the network processor
device to handle identification, classification and processing tasks
simultaneously.

     Earlier generations of network processors required multiple integrated
circuit chips and related hardware and software to perform the requisite
designed-in functions, placing limitations both on the amount of data that could
be handled simultaneously and the speed at which it could be processed.
Moreover, most of these earlier solutions employed generic RISC processors
rather than specially designed processors. EZchip's advance over these earlier
designs lies in its integration of processing and classification functions. This
is accomplished though EZchip's Task Optimized Processing technology
(TOPcore(R)). TOPcore technology, which includes patented elements and other
proprietary information, uses a combination of chip architecture and innovative
search algorithms, together with low-cost, power-efficient DRAM memories, to
incorporate these functions on a single chip. As a result, systems designed
using EZchip's products offer equipment vendors the ability to reduce chip
count, power consumption and cost.


                                       25
<PAGE>


     In most applications, a significant number of chips, called search engines
that work in conjunction with the network processor are devoted to searching
through large routing and policy tables resident in the memory. These chips are
expensive and have high power consumption. Our products address these
shortcomings by integrating the network processing functionality along with the
search engines onto a single chip. By integrating both these functions on the
same chip, we improve performance and eliminate the latency associated with
having to go off-chip for lookup functions. EZchip's TOPcore technology is
presently featured in its NP-1 and NP-1c products, which are capable of serving
a 10-Gigabit, seven-layer network. In addition, this technology will be employed
in the NP-2 product family.

RESEARCH AND PRODUCT DEVELOPMENT

     Currently, 57 employees, representing about 74% of EZchip's employees, are
engaged in research and development. EZchip's senior executives devote a
substantial portion of their time in communicating with customers to determine
what product needs should be addressed.

     The following table sets forth research and development costs for the
periods indicated (in thousands):

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                                --------------------------
                                                                 2002      2003     2004
                                                                ------    ------   ------
<S>                                                             <C>       <C>      <C>
         Research and Development Costs,
            Excluding Amortization                              $7,570    $7,099   $7,267
         Amortization of Prepaid Development and
            Production Costs*                                      505       120       --
         Research and Development, Including Amortization        8,075     7,219    7,267
</TABLE>

----------
* During 2000, we recorded prepaid development and production costs of
$2,134,000 under an agreement signed between EZchip and IBM (See Note 7 to the
Financial Statements). According to the agreement, EZchip issued to IBM fully
vested ordinary shares, in consideration for the development by IBM of unique
semiconductor communications cores and technologies and production of
specialized high-performance embedded DRAM cores, which meet the rigorous
requirements of EZchip's 10-Gigabit wire-speed processing. Development costs are
amortized according to specific milestones determined in the agreement and
production costs are amortized based on quantities produced.


                                       26
<PAGE>


SALES AND MARKETING

     Our objective is to become a leading supplier of high-speed network
processors. To meet this objective, we devote significant resources into
securing new customers, preferably leading networking equipment vendors, and we
place an emphasis on assisting our existing customers in bringing their products
to production.

     In general, it takes a customer one to two years to design a networking
product based on our network processors chips. During this design phase the
revenues we recognize are mostly attributable to the sale of evaluation systems
and development software toolkits, that our customers are using to assist in the
initial development of their own network processor based products. As they move
to development of their own boards with the network processor, they purchase
sample chips from us for testing purposes. Once their own designs are completed,
they move into production phase where they begin to manufacture their products.
At this point, they purchase a limited number of network processors for the
initial production stage. Depending upon the acceptance of their products in the
marketplace and the speed of deployment of projects with them, the customer may
or may not increase production. Volume production of a customer's product is
expected to translate into volume sales of our network processors. EZchip has no
direct influence upon the sales and marketing of our customers' products.

     To date 44 customers have purchased development kits and started research
and/or designs of networking products based on our network processors. These
customers have a total of eleven NP-1/NP-1c based products in production. The
majority of these products are in early production stages and have not yet
reached the stage of volume manufacturing. Our 2004 revenues increased 160% to
$4.7 million, up from $1.8 million in 2003, as the result of the relatively
small number of our customers' products that have reached volume production. Our
future revenue growth will depend on market acceptance of our customers'
products and on the pace of growth in the telecommunications and related
markets.

     Since we expect the 10-Gigabit NPU market to continue to grow, we believe
that by securing more customers and more design wins we are strengthening our
market position and increasing our potential market share. We work closely with
existing and potential customers in their design of systems and equipment where
the capabilities of EZchip's products can be exploited. We are targeting
designers, manufacturers and vendors of networking equipment and other
large-scale data processing network devices, such as switches and routers.



                                       27
<PAGE>


     To facilitate marketing efforts, EZchip has built on its extensive industry
exposure through trade shows and similar events and has established sales
offices in California and Massachusetts. In Israel and North America, we have
our own direct sales force. Currently, our sales and marketing staff includes 11
marketing professionals and administrative personnel. The direct sales force
consists of persons with technical training and significant background in the
semiconductor industry. Sales efforts are augmented by the direct involvement of
EZchip's senior executives, who work closely with customers to determine product
needs. In the rest of the world, our strategy is to work with local marketing
channels, including sales agents, resellers and distributors. These channels are
assigned territories of primary responsibility, with exclusive rights in some
cases. We will consider the need for local sales offices when justified by the
circumstances. Our in-house sales and marketing force and the external marketing
channels are also responsible for providing local technical support. Our
marketing activities include:

     o    Seminar programs, trade shows, guest speaker invitations and technical
          conferences;

     o    Public relations activities and customer events;

     o    Technical articles in industry publications and marketing collateral
          materials; and

     o    Communication on the Internet.

     The NP-1/NP-1c network processor gained industry recognition, including
being voted finalist for the 2002 World Technology Award for Communications
Technology, being awarded the 2002 Comet Award from Communication Systems Design
Magazine, being chosen as both Best Overall Product and Best Network Processor
at the 2002 Network Processor Conference West, being awarded the Microprocessor
Report Analysts' Choice Award for Best Network Processor in February 2003, and
being awarded the analogZONE 2003 Product of the Year in January 2004. EZchip
received the Fabless Semiconductor Association's (FSA) Outstanding Financial
Performance by a Private Company award in December 2004.

     The NP-1c network processor completed three industry performance benchmarks
for key applications in May 2004. The LinleyBenchTM network processors
benchmark, the Network Processing Forum (NPF) MPLS Forwarding Benchmark and the
NPF IP Forwarding Benchmark for IPv6 and IPv4. We believe NP-1c is the only
10-Gigabit network processor to complete the NPF MPLS Forwarding and the
LinleyBench benchmarks. All tests were conducted at The Tolly Group, selected by
the NPF and The Linley Group as the independent certification authority. The
test scenarios and results are published and available to the public for review.

     We also work with leading vendors of complementary technologies to provide
our customers with fully interoperable solutions. At present we have announced
interoperability with switching fabrics and traffic managers from Applied Micro
Circuits Corporation (AMCC), TeraChip Inc, Teradiant, Dune Networks, Integrated
Device Technology (IDT), Vitesse and Broadcom Corporation as well as other
peripheral devices from Broadcom Inc, Ample Communications, ZettaComm Inc.,
Vitesse and PMC-Sierra Inc.


                                       28
<PAGE>


CUSTOMERS AND CUSTOMER SUPPORT

     To date 44 customers have purchased development kits and started designs of
networking products based on our network processors. Of these, customers have a
total of eleven NP-1/NP-1c based products in production. Publicly announced
customers include Nokia Networks, ZTE corporation, BATM/Telco Systems, ETRI
(Korea's Electronics and Telecommunications Research Institute) ECI Telecom,
Crescendo Networks and Huawei-3Com. We do not expect that all of our customers
will reach production stage, as projects may be halted, delayed or cancelled and
there is also no assurance that products that have reached production will be
successfully accepted in the marketplace.

     Customer support is provided from our Israeli headquarters as well as our
two offices in the United States. The primary business center in the United
States is located on the West Coast in the Silicon Valley area, and a Boston
office services the Eastern United States and Europe.

     EZchip offers training courses to provide its customers with a complete
understanding of its products and toolsets.

COMPETITION

     The semiconductor market, particularly the high-performance semiconductor
market, is highly competitive and subject to rapid technological change, price
erosion and heightened international competition. Especially in an area such as
network processors, where technology has not been standardized and where
applications are in early stages of development, competitive pressures can be
fierce. Many of our competitors including, Intel Corporation, Agere Systems Inc.
and Applied Micro Circuits Corporation are larger, have significantly greater
sales, have greater financial resources, and are better known. Other competitors
are startup companies including, Xelerated, Sandburst, Bay Microsystems and
Greenfield.

     We believe that the principal elements of competition in the market for
advanced network processors are chip count (that is, the number of chips needed
in a given application to achieve the system manufacturer's design goals), power
usage (that is, the watts of electric power required to operate the chip), price
and flexibility. Our research and development effort seeks to minimize the first
three elements while maximizing the level of flexibility. Our ability to compete
in this emerging market depends largely upon our ability to offer better design
and performance than our competitors.

     All of our competitors' announced products use separate chips for
processing and classifying, with half-duplex or full-duplex processing abilities
being the main differentiating factor. We combine the processing and classifying
functions in a single chip, which we believe provides a significant advantage in
terms of chip count, power consumption and cost. Our solution, based upon
EZchip's patented TOPcore(R) (Task Optimized Processor) architecture, offers
savings in the number of chips required in customers' applications. In a typical
application, the announced competitive products require an average of more than
25 chips for a complete solution, compared to a single EZchip NP-1/NP-1c chip
and four memory chips. Furthermore, EZchip's network processors use low-cost and
low-power DRAM memories, while the competitive products use expensive and
power-consuming SRAM and CAM memory components, thereby increasing the overall
price and complexity of our competitors' products.


                                       29
<PAGE>


     The NP-2 product family will take this integration even further through by
adding traffic managers into the network processor chip. Traffic managers are
typically separate chips, placed along side the network processor on the board,
that enable the control of the flow of traffic and implementation of Quality of
Service features. We believe that the NP-2 will be the first 10-Gigabit network
processor on the market to combine processing, classification and traffic
management on a single chip.

     While we believe that the NP-1, NP-1c and NP-2 chips surpass the known
products of our competitors in these characteristics, there can be no assurance
that our products will retain their differentiation or competitive edge for any
specific period of time.

INTELLECTUAL PROPERTY RIGHTS

     We rely primarily on a combination of trade secrets and employee and
third-party nondisclosure agreements to protect our intellectual property, as
well as limiting access to the distribution of proprietary information. We
cannot assure you that the steps taken to protect our intellectual property
rights will be adequate to prevent misappropriation of our technology or to
preclude competitors from independently developing such technology. Furthermore,
we cannot assure you that, in the future, third parties will not assert
infringement claims against us or with respect to our products.

     As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property rights.
Third parties may claim that we are infringing their intellectual property
rights. We have certain indemnification obligations to customers with respect to
the infringement of third party intellectual property rights by our products.
There can be no assurance that infringement claims by third parties or claims
for indemnification by customers or end users of our products resulting from
infringement claims will not be asserted in the future or that such assertions,
if proven to be true, will not materially adversely affect our business,
financial condition or operating results. In the event of any adverse ruling in
any such matter, we could be required to pay substantial damages, which could
include treble damages, cease the manufacturing, use and sale of infringing
products, discontinue the use of certain processes or obtain a license under the
intellectual property rights of the third-party claiming infringement. There can
be no assurance that a license would be available on reasonable terms or at all.
Any limitations on our ability to market our products, any delays and costs
associated with redesigning our products or payments of license fees to third
parties or any failure by us to develop or license a substitute technology on
commercially reasonable terms could have a material adverse effect on our
business, financial condition and operating results.

     We hold four United States patents, No. 6,532,457, No. 6,594,655, No.
6,625,612 and No. 6,778,534. There can be no assurance that others will not
develop technologies that are similar or superior to our technology, or design
around any patents issued to us. Despite our efforts to protect our proprietary
rights, unauthorized parties may copy aspects of our products or obtain and use
information that we regard as proprietary. Policing any of such unauthorized
uses of our products is difficult, and although we are unable to determine the
extent to which piracy of our software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect proprietary rights as fully as do the laws of the
United States or Israel. There can be no assurance that our efforts to protect
our proprietary rights will be adequate or that our competitors will not
independently develop similar technology.


                                       30
<PAGE>


MANUFACTURING

     While we engineer and design our products, we do not own or operate a
semiconductor fabrication facility and we do not have the resources to
manufacture our products internally. In November 2000, we entered into an
agreement with IBM to manufacture our NP-1 and NP-1c network processors. A third
party manufacturer has also been secured for the QX-1 Traffic Manager. We will
be using the Taiwan Semiconductor Manufacturing Co. (TSMC) fabrication facility
to manufacture our forthcoming NP-2 line of products, using the 0.13 micron
process. This fabless manufacturing model enables us to focus on our engineering
and design strengths, minimize fixed costs on capital expenditures, and still
have access to high-volume manufacturing capacity.

     The NP-1 network processors are being manufactured using IBM's SA-27E
0.18-micron ASIC technology, while NP-1c network processors utilize IBM's
0.11-micron Cu-11 ASIC template. Use of this new manufacturing technology
enables enhanced performance while reducing manufacturing costs significantly.

     We expect that all of our products will be single sourced from fabrication
facilities and any late delivery or failure to deliver products could result in
delays in satisfying customer demand, increased costs and loss of revenues.

LEGACY OPERATIONS

     Our original business concentrated on the development, manufacturing and
marketing of solutions and Internet applications to improve the connectivity and
performance of corporate LANs. Beginning in 1999, we carried out plans to focus
exclusively on the high speed network processor market, through our subsidiary,
EZchip, resulting in the cessation of the operations of our Internet
applications business segment principally consisting of NetGuard and, prior to
that also including NetXchange. As a result of the closure of NetGuard's
operations in 2001, and the cessation of LanOptics legacy operations, the
related assets, liabilities and results of operations have been reclassified on
our financial statements as "discontinued operations."

C. ORGANIZATIONAL STRUCTURE

     In mid-1999 we decided to focus on our internal application-specific
integrated circuit (ASIC) team to start a new business initiative. This new
business initiative was incorporated as E.Z. Chip Technologies Ltd. in December
1999. Through EZchip, we are engaged in the development and marketing of high
performance network processors. Since its inception EZchip has raised $51
million in three private financing rounds, of that amount $11.6 million was
invested by LanOptics and the balance by EZchip minority shareholders. We
currently have a 53.4% ownership interest in EZchip. We intend to increase our
ownership position in EZchip through the exchange of our shares for EZchip
shares.


                                       31
<PAGE>


PROPERTY, PLANTS AND EQUIPMENT

     Our principal capital expenditures to date have been the purchase of
equipment and other fixed assets used in our business, mainly in Israel. These
purchases totaled $435,000 in 2002, $265,000 in 2003 and $206,000 in 2004. Our
capital expenditures in 2002, 2003 and 2004 were spent primarily for the
procurement of EZchip research and development hardware equipment and software
tools.

     We do not own any real property. Our principal development, marketing and
administrative facilities occupy approximately 25,000 square feet of a building
in Yokneam, Israel which is leased through January 2007.

     EZchip, which conducts its sales operations through two locations in the
United States, leases office space in California and Massachusetts under
six-month renewable leases, and it currently maintains three sales people in
each office.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     The following discussion and analysis should be read in conjunction with
"Item 3. Key Information" and the Consolidated Financial Statements and notes
thereto included herein.

GENERAL

     We design, develop, manufacture, market and support network processors,
through our subsidiary, EZchip. For the past four and a half years, we have
carried out plans to focus on the network processor market, including the
cessation of our investment in research and development for LAN switching
products and, the closure of the operations of our Internet applications
business segment principally comprised of the operations of NetGuard and
NetXchange. Our resources are now focused exclusively on EZchip. Due to this
shift in focus, our sales, which until 2002 were comprised solely of our legacy
LanOptics and NetGuard products, decreased significantly after fiscal year 1999
and have begun to increase in the last few fiscal years.

     We maintain our accounts in U.S. dollars. Because the U.S. dollar is the
currency of the primary economic environment in which our operations are
conducted. We hold most of our cash, cash equivalents and marketable securities
in US dollars, sales prices are quoted in U.S. dollars and the majority of
purchases of materials and components are quoted invoiced and paid in U.S.
dollars. In addition, a majority of other expenses, principally R&D engineering
services and marketing expenses, are incurred outside Israel in U.S. dollars or
paid in U.S. dollars. Nevertheless, a significant portion of the cost of our
Israeli operations, mainly personnel related, is incurred in NIS. See Note 2b to
our Consolidated Financial Statements.

     Commencing January 1, 2004, we adopted generally accepted accounting
principles in the United States ("U.S. GAAP") for the preparation of our
consolidated financial statements. Previously, our consolidated financial
statements were prepared in accordance with generally accepted accounting
principles in Israel, or Israeli GAAP, and included a note describing the major
differences between Israeli GAAP and US GAAP, as applicable to our company. The
consolidated financial statements for all prior periods presented have been
restated and are presented in accordance with U.S. GAAP.


                                       32
<PAGE>


     On December 22, 2004, we filed an amendment to our Annual Report on Form
20-F for the fiscal year ended December 31, 2003, which was originally filed on
April 1, 2004. This amendment was filed solely to correct information in note 18
to the consolidated financials statements filed in Item 18 and with respect to
information derived from such footnote included in the financial data provided
in Item 3.A of our Annual Report on Form 20-F for the fiscal year ended December
31, 2003. As initially filed, note 18 to the consolidated financial statements
had an error in reconciling the amounts allocated to goodwill, in-process
research and development, technology, property and equipment and prepaid
development and production costs under Israeli GAAP to the amounts to be
allocated under U.S. GAAP.

     On December 23, 2004, we filed another amendment to our Annual Report on
Form 20-F for the fiscal year ended December 31, 2003. This amendment was filed
by LanOptics to amend Item 18, and where necessary, various other Items of the
Form 20-F to reflect the presentation of the financial statements according to
U.S. GAAP. This Amendment was incorporated by reference into a Form F-3
Registration Statement filed on December 23, 2004, covering the resale of our
ordinary shares by certain selling shareholders.

CRITICAL ACCOUNTING ESTIMATES

     The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, management evaluates its estimates
and judgments. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Under different assumptions or conditions, actual
results may differ from these estimates.

     Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of our consolidated financial statements:

REVENUE RECOGNITION

     We generate most of our revenues from sales of network processors chips and
to a lesser extent from the sales of network-processor based systems, software
tools and evaluation boards, through EZchip. and it's wholly owned subsidiary
EZchip Inc.

     In general, it takes one to two years to design a networking product based
on EZchip network processors chips. During this design phase the revenues we
recognize are mostly attributable to the sale of evaluation systems and
development software tools, that our customers use to assist in the initial
development of their own network processor based products. As they move to
development of their own boards with the network processor, they purchase sample
chips from us for testing purposes. Once their own designs are completed, they
move into production phase where they begin to manufacture their products. At
this point, they purchase a limited number of network processors chips for the
initial production stage. Depending upon the acceptance of their products in the
marketplace and the speed of deployment of projects with them, the customer may
or may not increase production. Volume production of customers' products is
expected to translate into volume sales of our network processors. EZchip has no
direct influence upon the sales and marketing of our customers' products.


                                       33
<PAGE>


     Revenues from sales of evaluation boards and development software tools,
required in the design period are recognized over the customers expected design
period - usually 12-18 months, which is the average time required for EZchip
customers to develop networking products, based on our network processors.

     Revenues from sales of network processors chips and production stage
network based systems are recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, the fee is fixed or determinable
and collectibility is probable. Generally, we do not have any significant
obligations after delivery. We do not grant a right of return to our customers.

     Arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets are recognized when certain criteria are
met.

     A multiple-element arrangement is separated into more than one unit of
accounting if the functionality of the delivered element(s) is not dependent on
the undelivered element(s), there is vendor-specific objective evidence (VSOE)
of fair value of the undelivered element(s) and delivery of the delivered
element(s) represents the culmination of the earnings process for those
element(s).

     If these criteria are not met, the revenue is deferred until such criteria
are met or until the period in which the last undelivered element is delivered.
If there is VSOE for all units of accounting in an arrangement, the arrangement
consideration is allocated to the separate units of accounting based on each
unit's relative VSOE.

     Deferred revenues include amounts received from customers for which revenue
has not been recognized.

INVENTORY VALUATION

     We are required to state our inventories at the lower of cost or market
price. In assessing the ultimate realization of inventories, we are required to
make judgments as to future demand requirements and compare that with the
current or committed inventory levels. Inventory write-offs are provided for
slow-moving items or technological obsolescence and are recorded in the
consolidated statement of operation


                                       34
<PAGE>


CONTINGENCIES

     We periodically estimate the impact of various conditions, situations
and/or circumstances involving uncertain outcomes to our financial condition and
operating results. These events are called "contingencies." A contingency is
defined as "an existing condition, situation, or set of circumstances involving
uncertainty as to possible gain or loss to an enterprise that will ultimately be
resolved when one or more future events occur or fail to occur." Legal
proceedings are a form of such contingencies.

     We are not currently involved in any significant legal proceedings and are
not required to assess the likelihood of any specific adverse judgments or
outcomes of such proceedings or of any potential ranges of probable losses. A
determination of the amount any accruals, if required, for these contingencies
would be made after careful analysis. As of December 31, 2004, we believe that
the status of legal proceedings will not have a material impact on our financial
condition, results of operations or cash flows. It is possible, however, that
future results of operations for any particular quarter or annual period could
be materially affected by changes in our assumptions or as a result of the
effectiveness of our strategies related to these legal proceedings.

ALLOWANCE FOR DOUBTFUL DEBTS

     Management continually reviews the collectibility of trade accounts
receivable and the adequacy of the allowance for doubtful debts against the
trade accounts receivable. Management specifically analyzes customer accounts,
account receivable aging reports, history of bad debts and the business or
industry sector to which they belong, customer concentrations, customer credit
worthiness, current economic trends and any other pertinent factors. Management
is able to make reasonably objective judgments on the adequacy of other
provisions relating to trade accruals.

PREPAID DEVELOPMENT AND PRODUCTION COSTS

     Prepaid development and production costs resulted from an agreement signed
between EZchip and IBM. According to the agreement, EZchip issued to IBM fully
vested ordinary shares, in consideration for the development by IBM of unique
semiconductor communications cores and technologies and production of
specialized high-performance embedded DRAM cores, which meet the rigorous
requirements of EZchip's 10-Gigabit wire-speed processing. Development costs
were amortized according to specific milestones determined in the agreement,
which we believe appropriately reflects the economic usage of the capitalized
asset. Production costs are included in cost of sales based on the ratio between
actual quantities produced and anticipated production quantities.


                                       35
<PAGE>


A. RESULTS OF OPERATIONS

     The following table presents, for the periods indicated, information
concerning the Company's results of operations (dollars in thousands).

INCOME STATEMENT DATA:


<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                             2000        2001        2002        2003        2004
                                                           --------    --------    --------    --------    --------
<S>                                                         <C>          <C>       <C>         <C>         <C>
Revenues                                                         --          --    $    465    $  1,756    $  4,746
Costs of revenues                                                --          --         163         624       1,889
Amortization of developed technology                             --          --          90         239        (241)
                                                           --------    --------    --------    --------    --------
Gross profit                                                     --          --         212         893       2,616

Operating expenses:
Research & development cost, net                              4,530       7,434       8,075       7,219       7,267
In-process research and development write-off                    --          --       3,928          --          --
Selling, general and administrative, net                      1,489       2,332       3,201       3,660       3,765
                                                           --------    --------    --------    --------    --------
Total operating expenses                                      6,019       9,766      15,204      10,879      11,032

Operating loss                                               (6,019)     (9,766)    (14,992)     (9,986)     (8,416)

Financial and other income (expenses), net *) .                  36       1,293         638        (418)       (738)
                                                           --------    --------    --------    --------    --------

Loss from continuing operations before minority interest     (5,983)     (8,443)    (14,354)    (10,404)     (9,154)
Minority interest is loss of a subsidiary                       115          80          --          --          --
                                                           --------    --------    --------    --------    --------

Loss from continuing operations                              (5,868)     (8,363)    (14,354)    (10,404)     (9,154)

Income (loss) from discontinued operations of a segment
of a business                                                (4,769)        793          51          --          --
                                                           --------    --------    --------    --------    --------

Net loss                                                    (10,637)     (7,570)    (14,303)    (10,404)     (9,154)

Net loss per share (basic and diluted)                        (1.56)      (1.04)      (1.85)      (1.23)      (0.98)
Net loss per share from continuing operations (basic and
diluted)                                                      (0.86)      (1.15)      (1.85)      (1.23)      (0.98)
Net earnings (loss) per share from discontinued
operations (basic and diluted)                                 (0.7)       0.11          --          --          --

</TABLE>


)* reclassified


                                       36
<PAGE>



YEARS ENDED DECEMBER 31, 2004 AND 2003

REVENUES

     For the twelve months ended December 31, 2004, revenues increased by
$2,990,000, or 170%, to $4,746,000 from $1,756,000 in the same period in 2003.
This increase is mainly attributable to purchases by several of our customers
that entered into their production stage for networking products incorporating
our network processors chips. EZchip first network processors became
commercially available during the second quarter of 2002. Therefore, the
majority of our revenues generated in 2003 resulted from customers in their
product design phase that purchased sample chips, evaluation systems and
software tools, enabling the development of new networking products based on our
network processor chips. The majority of our 2004 revenues were derived from
sales of network processor chips to several of those customers who completed the
design phase and entered production during 2004.

COST OF REVENUES

     For the twelve months ended December 31, 2004, our cost of revenues
increased by $1,265,000, or 203%, to $1,889,000 (40% of revenues) from $624,000
(36% of revenues) in the same period in 2003. The increase in cost of revenues
is the result of the increase in revenues. The increase in cost of revenues as a
percentage of revenues is the result of the increased volume production orders,
characterized by lower unit prices and a change in the mix of our sales, with a
higher contribution from the sale of chips and other hardware products compared
to software and services in the 2004 period.

GROSS PROFIT

     For the twelve months ended December 31, 2004, gross profit increased by
$1,723,000, or 193%, to $2,616,000 (55% of revenues) from $893,000 (51% of
revenues) in the same period in 2003. This increase was primarily attributable
to the increase in revenues.

RESEARCH AND DEVELOPMENT COST, NET

     Research and development costs consist mainly of the salary and benefits of
engineers and costs related to external engineering design services. Reported
figures consist entirely of EZchip's research and development costs. For the
year ended December 31, 2004, research and development costs increased by
$48,000, or 0.7%, to $7,267,000 from $7,219,000 in the 2003 period.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses consist primarily of salaries,
participation in trade shows and travel expenses as well as legal, accounting
and other administrative costs. For the twelve months ended December 31, 2004,
these expenses increased by $105,000, or 3%, to $3,765,000 from $3,660,000 in
the same period in 2003.


                                       37
<PAGE>


FINANCIAL AND OTHER INCOME (EXPENSES), NET

     Financial and other income/(expenses) reflects the income or expenses both
from traditional investment income or financing expenses and from exchange rate
fluctuations and currency translation. For the twelve months ended December 31,
2004, net financial expenses increased by $320,000, or 77%, to $738,000 from net
financial expenses of $418,000 in the same period in 2003. This increase is
mostly attributable to a longer period and a higher amount of interest accruals
on EZchip's Series C Preferred shares during the 2004 period. EZchip Series C
Preferred shares were issued during March 2003 ($11.2M to minority holders) and
during March 2004 ($2.6M to minority holders) and bear 6% annual interest.

YEARS ENDED DECEMBER 31, 2003 AND 2002

REVENUES

     For the twelve months ended December 31, 2003, revenues increased by
$1,291,000, or 278%, to $1,756,000 from $465,000 in the same period in 2002.
This increase is attributable to the increasing number of customers choosing
EZchip for the development of their future networking products. EZchip started
to generate revenues during the second quarter of 2002, when its first network
processor, the NP-1, became commercially available. Therefore, revenues for the
twelve months ended December 31, 2002 represent only approximately seven months
of revenues, generated from only a few customers, while the revenues for the
twelve months ended December 31, 2003 represent revenues for the full period
generated from approximately 30 customers designing networking products that
incorporate our network processors chips.

COST OF REVENUES

     For the twelve months ended December 31, 2003, our cost of revenues
increased by $461,000, or 283%, to $624,000 (36% of revenues) from $163,000 (35%
of revenues) in the same period in 2002. The increase in cost of revenues is the
result of the increase in revenues.

GROSS PROFIT

     For the twelve months ended December 31, 2003, gross profit increased by
$681,000, or 321%, to $893,000 (51% of revenues) from $212,000 (46% of revenues)
in the same period in 2002. This increase was primarily attributable to the
increase in revenues.

RESEARCH AND DEVELOPMENT COST, NET

     Research and development costs consist mainly of the salary and benefits of
engineers. Reported figures consist entirely of EZchip's research and
development costs. For the twelve months ended December 31, 2003, research and
development costs decreased by $856,000, or 11.0%, to $7,219,000 from $8,075,000
in the same period in 2002. This decrease was primarily due to higher
non-recurring engineering expenses that were incurred during the 2002 period
with respect to the development of the NP-1 network processor and the QX-1
traffic manager and also due to the higher level of amortization of prepaid
development costs during 2002.


                                       38
<PAGE>


SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses consist primarily of salaries,
participation in trade shows and travel expenses as well as legal, accounting
and other administrative costs. For the twelve months ended December 31, 2003,
these expenses increased by $459,000, or 14%, to $3,660,000 from $3,201,000 in
the same period in 2002 This increase was primarily due to increased sales and
marketing efforts by EZchip and also due to of non-recurring legal and
accounting expenses of approximately $340,000 in 2003.

FINANCIAL AND OTHER INCOME (EXPENSES), NET

     Financial and other income (expenses) reflects the income or expenses both
from traditional investment income or financing expenses and from exchange rate
fluctuations and currency translation. For the twelve months ended December 31,
2003, net financial expenses decreased by $1,056,000, or 166%, to $(418,000)
from net financial income of $638,000 in the same period in 2002. This decrease
is composed of (i) $549,000 that is attributable to: significantly lower average
interest rates on our investments portfolio in 2003 compared to 2002,
fluctuations in currency translation as a result of the change in the value of
the NIS compared to the US dollar during 2003 and interest expenses associated
with the $1.5 million credit line drawn by EZchip in May 2003; and (ii) $504,000
that is attributable to accrued interest expense, related to EZchip's Series C
Preferred shares.

EFFECTIVE CORPORATE TAX RATE

     Israeli companies are subject to corporate tax on their taxable income at a
rate of 35% (in the 2004 tax year), 34% (in the 2005 tax year), 32% (in the 2006
tax year) and 30% (in and after the 2007 tax year). However, because we have
elected to participate in the alternative package of tax benefits for our
current approved enterprise, the income derived from that enterprise will be
exempt from Israeli corporate tax for a specified benefit period (except to the
extent that dividends are distributed during the tax-exemption period other than
upon liquidation) and subject to reduced corporate tax rates for an additional
period. The period of tax benefits for EZchip's approved enterprise expires in
2013. Certain investment income derived by EZchip from investments may not be
regarded by the Israeli tax authorities as income from its approved enterprise
and consequently may be taxed at the regular statutory rate in Israel.

     We and EZchip have tax loss carryforwards resulting from the years up to
and including 2004 amounting to approximately $50,943, which may be carried
forward indefinitely.

     EZchip Inc. is subject to U.S. income taxes and has a loss carryforward
resulting from the years up to and including 2004 amounting to approximately
$3,334.

     Utilization of the U.S. net operating losses may be subject to substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses before utilization. In
addition, we have accumulated capital losses in the amount of $21.7 million. We
have not established a deferred tax asset resulting from temporary differences
between the basis of assets for financial and tax reporting purposes, as it has
been determined that it is more likely than not that such deferred tax assets
will not be realized.

                                       39
<PAGE>


IMPACT OF CURRENCY FLUCTUATION AND OF INFLATION

     A significant portion of the cost of our Israeli operations, mainly
personnel and facility-related, is incurred in NIS. Therefore, our NIS related
costs, as expressed in US dollars, are influenced by the exchange rate between
the US dollar and the NIS. In addition, if the rate of inflation in Israel will
exceed the rate of devaluation of the NIS in relation to the US dollar, or if
the timing of such devaluations were to lag considerably behind inflation, our
cost as expressed in US dollars may increase. NIS linked balance sheet items,
may also create foreign exchange gains or losses, depending upon the relative
dollar values of the NIS at the beginning and end of the reporting period,
affecting our net income and earnings per share. Although we may use hedging
techniques, we may not be able to eliminate the effects of currency
fluctuations. Thus, exchange rate fluctuations could have a material adverse
impact on our operating results and share price. The caption "Financial income
(expenses), net" in our Financial Statements includes the impact of these
factors as well as traditional interest income or expense. See Note 14a to the
Company's Financial Statements.

     The following table sets forth, for the periods indicated, (i) devaluation
of the NIS against the most important currencies for our business, the U.S.
dollar, and (ii) inflation as reflected in changes in the Israeli consumer price
index.



<TABLE>
<CAPTION>
                                            FISCAL YEAR ENDED DECEMBER 31,
                                     -------------------------------------------
                                      2000      2001     2002     2003     2004
                                     ------    -----    -----    ------   ------
<S>                                  <C>        <C>      <C>     <C>      <C>
Devaluation of NIS vs. U.S. Dollar   (2.7)%     9.3%     7.3%    (7.6)%   (1.6)%
Israeli Consumer Price Index           --       1.4%     6.5%    (1.9)%    1.4%
</TABLE>

B. LIQUIDITY AND CAPITAL RESOURCES

     Historically we have satisfied our financial requirements primarily through
equity investments, funds provided by operations and, through research and
development grants. EZchip's research and development has not been funded by
Israel's Office of Chief Scientist, but rather has been funded through the
proceeds of third party investments, combined with contributions by LanOptics.

     In 2000, we conducted two rounds of financing for EZchip, raising $27.2
million through the private placement of EZchip's Series A and B Preferred
shares, of which we invested $2 million. The amount of investments by third
parties was recorded as preferred shares of a subsidiary in our financial
statements. In addition, we made a $2 million investment in EZchip during 2000.

     In early 2003, EZchip raised $13.5 million in a private placement of Series
C Preferred shares, of which amount we invested $2.3 million. In addition,
EZchip obtained a $3 million credit facility, of which $1.5 million was drawn
down. In September 2004 the $1.5 million was repaid.

     The terms of the Series C Preferred share financing also provided the
investors in the private placement with an option to invest up to another $8
million in the future. This option was exercised on March 9, 2004, resulting in
a follow-on Series C Preferred share investment in EZchip in the amount of $8
million, of which we invested $5.3 million.


                                       40
<PAGE>


     On December 16, 2003, we concluded a $6 million private placement of our
ordinary shares to Deutsche Bank AG, London Branch. $5.3 million of the proceeds
were used to fund the exercise of our option to purchase EZchip Series C
Preferred shares, which increased our ownership interest in EZchip to 53.4%. The
investors in this private placement were granted warrants to purchase 187,500
Ordinary shares at an exercise price of $11.39 per share with an exercise period
of five years

     On November 26, 2004, we concluded a $14.3 million private placement of our
ordinary shares to several institutional investors. The private placement was
undertaken to strength our balance sheet and insure our control over EZchip in
the event of additional private investment in EZchip, as well as for other
general corporate purposes. The investors in this private placement were granted
warrants to purchase 478,800 Ordinary shares at an exercise price of $15.5 per
share with an exercise period of five years

     As of December 31, 2004 we had $25.1 million in working capital and $25.6
million in cash, cash equivalents and marketable securities. Our cash, cash
equivalents and marketable securities balance increased in 2004 by approximately
$6.1 million as a result of the following:

     o    Approximately $8.3 million was used in operating activities.

     o    Financing activities provided approximately $14.6 million. We raised
          approximately $16.1 million in private investments by third parties,
          which was offset by the repayment of a $1.5 million loan.

     o    Approximately $0.2 million was used for the purchase of property and
          equipment.

     We believe that our unused cash, cash equivalents and marketable securities
balances will provide sufficient cash resources to finance our operations at
least through the end of 2006. However, if we grow more rapidly than currently
anticipated or, if we do not generate sufficient revenues, it is possible that
we would require additional funds before the end of such period.


                                       41
<PAGE>


C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

     Currently, 57 employees, representing about 74% of EZchip's employees, are
engaged in research and development. EZchip's senior executives devote a
substantial portion of their time in communicating with customers to determine
what product needs should be addressed.

     The following table sets forth research and development costs for the
periods indicated (in thousands):

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                                --------------------------
                                                                 2002      2003     2004
                                                                ------    ------   ------
<S>                                                             <C>       <C>      <C>
         Research and Development Costs,
            Excluding Amortization                              $7,570    $7,099   $7,267
         Amortization of Prepaid Development and
            Production Costs*                                      505       120       --
         Research and Development, Including Amortization        8,075     7,219    7,267
</TABLE>

----------
* During 2000, we recorded prepaid development and production costs of
$2,134,000 under an agreement signed between EZchip and IBM (See Note 7 to the
Financial Statements). According to the agreement, EZchip issued to IBM fully
vested ordinary shares, in consideration for the development by IBM of unique
semiconductor communications cores and technologies and production of
specialized high-performance embedded DRAM cores, which meet the rigorous
requirements of EZchip's 10-Gigabit wire-speed processing. Development costs are
amortized according to specific milestones determined in the agreement and
production costs are amortized based on quantities produced.

     We rely primarily on a combination of trade secrets and employee and
third-party nondisclosure agreements to protect our intellectual property, as
well as limiting access to the distribution of proprietary information. We
cannot assure you that the steps taken to protect our intellectual property
rights will be adequate to prevent misappropriation of our technology or to
preclude competitors from independently developing such technology. Furthermore,
we cannot assure you that, in the future, third parties will not assert
infringement claims against us or with respect to our products.

     We hold four United States patents, No. 6,532,457, No. 6,594,655, No.
6,625,612 and No. 6,778,534.

D. TREND INFORMATION

     To date 44 customers have purchased development kits and started designs of
networking products based on our network processors. Of these, customers have a
total of eleven NP-1/NP-1c based products in production. The majority of these
products are in early production stages that do not yet reflect volume
manufacturing. Our 2004 revenues increased 160% to $4.7 million, up from $1.8
million in 2003, as the result of the relatively small number of our customers'
products that have already reached volume production. Our future revenue growth
will depend on market acceptance of our customers' products and on the pace of
growth in the telecommunications and related markets.

                                       42
<PAGE>


     In 2004, we announced the development of EZchip's NP-2, a powerful
10-Gigabit Network Processor combined with a Traffic Manager on the same chip.
Whereas our current chip NP-1c is targeted mainly at service cards in
communication applications, the NP-2 will address line card and pizza box
applications, offering what we believe is a significant increase in EZchip's
market opportunity. The NP-2 has been favorably accepted and we are generating a
growing number of design wins that relate to it. We expect NP-2 to sample in the
second quarter of 2005 and to see customer's NP-2 based products in volume
production in 2006.

E. OFF-BALANCE SHEET ARRANGEMENTS

     We are not a party to any material off-balance sheet arrangements. In
addition, we have no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligations.

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

     The following table summarizes our minimum contractual obligations and
commercial commitments, including obligations of discontinued operations, as of
December 31, 2004 and the effect we expect them to have on our liquidity and
cash flow in future periods.


<TABLE>
<CAPTION>
                                      Payments due by period


                                             Less than                            More than 5
Contractual Obligations         Total         1 year       1-3 years    3-5 years   years
-----------------------       ---------     ----------     ----------   ---------- --------
<S>                           <C>           <C>           <C>           <C>           <C>
Operating lease obligations   $ 1,526,000   $   711,000   $   815,000            --   --
Other long-term liabilities
reflected on the company's
balance sheet (1)             $15,151,000            --   $12,376,000   $ 2,775,000   --
Total                         $16,677,000   $   711,000   $13,191,000   $ 2,775,000   --

</TABLE>

(1) During March 2003 and during March 2004, EZchip issued to LanOptics and to
third parties 26,345,092 Series C Preferred shares, in consideration of
$21,500,000. The net amount of $13,491,000, which was invested by third parties,
was recorded as redeemable preferred shares in a subsidiary. After four years
from the issuance date and subject to the request of the majority holders of
Series C Preferred shares, EZchip may be required to redeem the Series C
Preferred shares at a price per share equal to the greater of (i) the original
Series C Preferred share issue price plus an amount equal to any accrued and
unpaid dividends thereon plus 6% coupon interest compounded annually or (ii) the
fair market value of such shares. The amount specified represents the original
Series C Preferred share issue price plus 6% accrued interest.


                                       43
<PAGE>


ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     Set forth below are the names of all directors and executive officers of
our company.

A. DIRECTORS

     The following individuals served on our Board of Directors throughout the
year ended December 31, 2003, and are currently the members of our Board of
Directors:

     Dr. Meir D. Burstin, 62, is Chairman of our Board of Directors as well as
the Chairman of the Board of Directors of EZchip. In addition, he is the
Chairman of Sivron, a security trade software company, and Director of Negev
Software, a communication monitoring company. Dr. Burstin was the Chairman and
founder of ART Advanced Recognition Technologies Inc., a speech and handwriting
recognition company, recently acquired by Scansoft. He was a founder and
chairman of the Board of Ornet, a data switching company founded in 1996 and
acquired by Siemens two years later. Dr. Burstin was a director of several other
high-tech companies and the Chairman of the Jerusalem Software Greenhouse. In
1969, Dr. Burstin was a founder of Advanced Technology Ltd. (ATL), one of
Israel's largest software companies at the time, and served as its president
until 1982. From 1982 to 1984, Dr. Burstin was a Visiting Scholar at the
Computer Science Department at UCLA and Vice President Technologies of Tadiran
U.S. In this position, he was in charge of the acquisition of technologies and
technology companies for Tadiran. Upon his return to Israel in 1984, he became a
Corporate Vice President of Tadiran Ltd., then one of Israel's largest
electronics companies, and President of Tadiran's Systems Division. In 1986, he
also became President of Elisra Systems, an electronic warfare company acquired
by Tadiran, and organized the acquisition. In addition, Dr. Burstin served as a
Chairman or Director of several Tadiran subsidiaries. Dr. Burstin holds a PhD in
Information Systems and Computers from Tel Aviv University. He received B.Sc.
degrees in Physics and Mathematics and an M.Sc. in Physics from the Hebrew
University of Jerusalem.

     Eli Fruchter, 49, is the President and Chief Executive Officer of EZchip, a
position that he has held since EZchip's inception, and has been a director of
our company since its inception. He served as General Manager of our company
from its inception until May 1999, and as President, Chief Executive Officer and
General Manager from May 1999 through September 1999. From March 1995 until
September 1999 he was the Chairman of the Board of Directors of our company. Mr.
Fruchter was among the founders of Adacom Technologies Ltd., a manufacturer of
data communications products for the IBM 3270 environment. From April 1985 until
December 1987 he served as a research and development manager at Adacom, and
from January 1988 until November 1989 he was the Manager of Adacom's Marketing
Department. Before helping to found Adacom in 1985, Mr. Fruchter was Manager -
Research and Development Group of Fibronics Ltd., a manufacturer of data
communications and fiber optics systems. Mr. Fruchter holds a B. Sc. degree in
Electrical Engineering from the Technion - Israel Institute of Technology.


                                       44
<PAGE>


     Benjamin (Benny) D. Gaon, 70, has been a director of our Company since
1995. Mr. Gaon is President and Chairman of Israel-registered B. Gaon Holdings
Ltd., whose activities encompass three main sectors: financial and other
services; agro-industries; and wholesale and retail. Previously, Mr. Gaon served
as President and Chief Executive Officer of Koor Industries Ltd., Israel's
largest industrial enterprise. Mr. Gaon is an active Chairman and Board member
of various companies in Israel, including Yakhin Hakal Holdings Ltd., Hamashbir
Holdings (1999) Ltd., H&O Hamashbir Fashion Ltd., Ahava Holdings Ltd., Dead Sea
Laboratories Ltd., B. Gaon Holdings Ltd., Or Assaf Investments Ltd., Genius
Technologies (1999) Ltd., B. Gaon Investments (1998) Ltd., Gaon Agro Industries
Ltd., Middle East Tube Company Ltd., Menorah Gaon Investment Company Ltd.,
Menora Gaon Capital Markets Ltd., B. Gaon Productions and Contents Ltd., Gaon
Communication Investments (2001) Ltd., Tal Sky Ltd., and Tel-Ad Jerusalem
Studios Ltd. He was the Chairman of the Board of Co-Op Blue Square Consumers'
Cooperative Society Ltd. and of Delek Israel Fuel Corporation Ltd. Among his
other public positions, Mr. Gaon serves as Chairman of the Israel-Jordan Chamber
of Commerce and as President of Israel Cancer Association. He also serves on the
Board of Trustees of the Hebrew University of Jerusalem and of Tel Aviv
University.

     Dr. Ran Giladi, 50, has been a director of our company since December 2001.
Dr. Giladi is a faculty member at Ben-Gurion University of the Negev, Beersheba,
where he founded and was the Head of the Department of Communication Systems
Engineering from 1992 until 2000. Dr. Giladi is also the active Chairman of
DiskSites, Inc. and of InfoCyclone Inc., a company he co-founded in September
2000, which produces storage appliances for owners of massively accessed
repositories and of which he was President and Chief Executive Officer from 2000
until 2002. Dr. Giladi taught at the Business School and at the Electrical
Engineering Department of Tel-Aviv University from 1987 until 1993. Dr. Giladi
co-founded Ramir Ltd., which was later acquired by Harris-Adacom, and served as
Vice President Research & Development in both companies from 1984 until 1986.
Dr. Giladi also founded the Israeli Consortia for research on network management
systems (NMS), and served as the Chairman of the Consortia Board of Directors.
His research interests include computer and communications systems performance,
data networks and communications, and network management systems. Dr. Giladi
received a B.A. in Physics and an M.Sc. in Biomedical Engineering from the
Technion - Israel Institute of Technology, and a Ph.D. in Computers and
Information Systems from Tel Aviv University.

     Karen Sarid, 55, has been a director of our company since December 2001.
Ms. Sarid is currently General Manager of Orex Computed Radiography Ltd.
(advanced radiography systems for the digital x-ray market), a Kodak company.
Prior to this and since September 2000, she held the position of Chief Operating
Officer and Chief Financial Officer at Orex. From September 1999 until September
2000 she was Chief Financial Officer and a member of the Board of Directors of
Forsoft Ltd., a software solutions provider and a subsidiary of the Formula
Group. From 1996 until August 1999 Ms. Sarid was Chief Financial Officer and a
member of the Board of Directors of ESC Medical Systems Ltd., a medical laser
manufacturer that is traded on NASDAQ Stock Market. She was Chief Financial
Officer of LanOptics from 1993 through 1996. Ms. Sarid received a B.A. in
Economics and Accounting from Haifa University, and was awarded the CFO of the
Year award in 1998 by the Association of Chief Financial Officers in Israel.

     In December 2004, Zvi Zur, one of our two outside directors, passed away.
Mr. Zur had been a director of the Company since February 1993. During this
period, he made a major contribution to the Company. The Board of Directors of
the Company expressed its appreciation and recognition of Mr. Zur's wise counsel
and tremendous experience, and the directors noted their sorrow at the loss of a
good friend and colleague. The Company is profoundly saddened by his passing.


                                       45
<PAGE>


     The Company is currently engaged in the search for a suitable candidate to
serve as an outside director of the Company. As required by Israeli law, the
Company will convene a shareholders meeting at the earliest practical
opportunity to elect a new outside director.

SENIOR MANAGEMENT

     In addition to Mr. Fruchter and Dr. Burstin, with respect to whom
information is provided above under "Directors," the following is the other
executive officer of the Company:

     Dror Israel, 36, has been our Chief Financial Officer since June 2001.
Prior to that he was our financial controller from January 2000 through May 2001
and a financial analyst from August 1997 through December 1999. Prior to joining
LanOptics, Mr. Israel was employed by Hi Group, a holdings company, as a
financial analyst. Mr. Israel holds a B.A. degree in economics from Haifa
University and a MBA cum laude from the Technion - Israel Institute of
Technology.

     There are no family relationships between any of our directors and
executive officers.

B. COMPENSATION OF DIRECTORS AND OFFICERS

     The aggregate amount of compensation paid during 2004 to all of our
directors and executive officers as a group for services in all capacities was
approximately $340,000. The aggregate amount set aside or accrued during 2004 to
provide pension, retirement or similar benefits for directors and officers of
our company, pursuant to any existing plan provided or contributed to by us, was
approximately $8,000.

     During 2004, one of our executive officers was awarded 205,000 options to
purchase shares of EZchip at an exercise price of $0.80 per share.

C. BOARD PRACTICES

APPOINTMENT OF DIRECTORS AND TERM OF OFFICE

     Our directors, other than our outside directors as described below, are
appointed by our shareholders at our annual general meeting and hold office
until the next annual general meeting. Our annual general meetings are held at
least once every calendar year, but not more than fifteen months after the last
preceding annual general meeting. In the intervals between our annual general
meetings, the board of directors may appoint new directors to fill vacancies.
Our officers serve at the discretion of the board of directors, subject to the
terms of any agreement between them and us and the provisions of the Israeli
Companies Law.

ALTERNATE DIRECTORS

     Our articles of association provide that any director may, by written
notice to us, appoint another person to serve as an alternate director. Under
the Israeli Companies Law, any person eligible to serve as a director (other
than a director or an existing alternate director) may act as an alternate
director. An alternate director may be appointed for one meeting or for another
specified period or until notice is given of the cancellation of the
appointment. To our knowledge, no director currently intends to appoint any
other person as an alternate director, except if the director is unable to
attend a meeting of the board of directors.


                                       46
<PAGE>


OUTSIDE AND INDEPENDENT DIRECTORS

     In accordance with the Israeli Companies Law and the regulations
promulgated under the Companies Law, the Company must have two outside
directors. The outside directors must meet certain statutory requirements of
independence. The term of office of an outside director is three years, which
can be extended for one additional term of three years. An outside director can
be removed from office only under very limited circumstances. Both of the
outside directors must serve on the company's statutory audit committee, and at
least one outside director must serve on each committee of the board of
directors. We have appointed Benjamin (Benny) D. Gaon and will elect a second
independent director at the next general meeting of shareholders to succeed Mr.
Zur as an outside director under the Israeli Companies Law.

     Pursuant to the current listing requirements of the Nasdaq Stock Market, we
are required to have at least two independent directors on our board of
directors. Under the new corporate governance rules adopted by Nasdaq, we will
be required to have three independent directors on our audit committee as of
July 31, 2005.

     There are no prescribed terms of service for the other directors of the
company.

AUDIT COMMITTEE

     The Israeli Companies Law requires public companies to appoint an audit
committee. The responsibilities of the audit committee include identifying
irregularities in the management of the company's business and approving related
party transactions as required by law. An audit committee must consist of at
least three directors including both of the outside directors. The chairman of
the board of directors, any director employed by or otherwise providing services
to the company, and a controlling shareholder or any relative of a controlling
shareholder may not be a member of the audit committee.

     Under Israeli law, an audit committee may not approve an action or a
transaction with a controlling shareholder, or with an office holder, unless at
the time of approval two outside directors are serving as members of the audit
committee and at least one of the outside directors was present at the meeting
in which an approval was granted.

     Pursuant to the current listing requirements of the Nasdaq Stock Market, we
are required to establish an audit committee, at least a majority of whose
members are independent of management. Pursuant to the Sarbanes-Oxley Act of
2002, the Securities and Exchange Commission, or the SEC, has issued new rules
which required Nasdaq to impose independence requirements on each member of the
audit committee. Nasdaq has adopted such rules that will be applicable to us as
of July 31, 2005. Among the corporate governance rules that will be applicable
to us as of July 31, 2005 is the requirement that we have an audit committee
consisting of at least three independent members, all of whom are financially
literate and one whom has accounting or related financial management expertise.

     The new Nasdaq rules implement two basic criteria for determining
independence: (i) audit committee members are barred from accepting any
consulting, advisory or other compensatory fee from the issuer or an affiliate
of the issuer, other than in the member's capacity as a member of the board of
directors and any board committee, and (ii) audit committee members may not be
an "affiliated person" of the issuer or any subsidiary of the issuer apart from
his or her capacity as a member of the board and any board committee.


                                       47
<PAGE>


     Our Audit Committee currently consists of Benjamin D. Gaon and Karen Sarid.
We believe that these appointments comply with the requirements of the Companies
Law and with the SEC and Nasdaq rules, and that Karen Sarid qualifies to serve
as the audit committee's financial expert, as required by the SEC and Nasdaq. We
will elect a third independent director to serve as a member of the Audit
Committee at our next general meeting of shareholders to fill the vacancy caused
by the death of Mr. Zur.

     Our Audit Committee reviewed our audited financial statements for the year
ended December 31, 2003 and members of the Committee met with both management
and our external auditors to discuss those financial statements. Management and
the external auditors have represented to the Audit Committee that the financial
statements were prepared in accordance with the generally accepted accounting
principles. Members of the Audit Committee have received from and discussed with
the external auditors their written disclosure and letter regarding their
independence from our company as required by Independence Standards Board
Standard No. 1. Members of the Audit Committee also discussed with the external
auditors any matters required to be discussed by Statement on Auditing Standards
No. 61. Based upon these reviews and discussions, the Audit Committee has
recommended to the Board of Directors that the audited financial statements be
included in our Annual Report on Form 20-F for the year ended December 31, 2004.

     We intend to appoint all our independent directors to serve on newly formed
nominating and compensation committees by July 31, 2005.

APPROVAL OF CERTAIN TRANSACTIONS; OBLIGATIONS OF DIRECTORS, OFFICERS AND
SHAREHOLDERS

     The Israeli Companies Law codifies the fiduciary duties that office
holders, including directors and executive officers, owe to a company. An office
holder's fiduciary duties consist of a duty of care and a duty of loyalty. The
duty of loyalty includes avoiding any conflict of interest between the office
holder's position in the company and such person's personal affairs, avoiding
any competition with the company, avoiding exploiting any corporate opportunity
of the company in order to receive personal advantage for such person or others,
and revealing to the company any information or documents relating to the
company's affairs which the office holder has received due to his position as an
office holder.

     Under the Israeli Companies Law, all arrangements as to compensation of
office holders who are not directors require approval of the board of directors
unless the articles of association provide otherwise. Arrangements regarding the
compensation of directors also require audit committee and shareholder approval.
The Israeli Companies Law requires that an office holder promptly disclose any
personal interest that he or she may have and all related material information
known to him or her, in connection with any existing or proposed transaction by
the company. In addition, if the transaction is an extraordinary transaction,
the office holder must also disclose any personal interest held by the office
holder's specified relatives, or by any corporation in which the office holder
is a five percent or greater shareholder, director or general manager or in
which the office holder has the right to appoint at least one director or the
general manager. An extraordinary transaction is defined as a transaction not in
the ordinary course of business, a transaction that is not on market terms, or a
transaction that is likely to have a material impact on the company's
profitability, assets or liabilities.


                                       48
<PAGE>


     In the case of a transaction that is not an extraordinary transaction,
after the office holder complies with the above disclosure requirement, only
board approval is required unless the articles of association of the company
provide otherwise. Such approval must determine that the transaction is not
adverse to the company's interest. If the transaction is an extraordinary
transaction, then in addition to any approval required by the articles of
association, it also must be approved by the audit committee and by the board
and, under specified circumstances, by a meeting of the shareholders. An Israeli
company whose shares are publicly traded shall not be entitled to approve such a
transaction unless, at the time the approval was granted, two members of the
audit committee were outside directors and at least one of them was present at
the meeting at which the audit committee decided to grant the approval. An
office holder who has a personal interest in a matter that is considered at a
meeting of the board of directors or the audit committee generally may not be
present at this meeting or vote on this matter.

     The Israeli Companies Law applies the same disclosure requirements to a
controlling shareholder of a public company, which includes a shareholder that
holds 25% or more of the voting rights if no other shareholder owns more than
50% of the voting rights in the company. Extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal
interest, and the terms of compensation of a controlling shareholder who is an
office holder, require the approval of the audit committee, the board of
directors and the shareholders of the company. The shareholder approval must
either include at least one-third of the votes of disinterested shareholders who
are present, in person or by proxy, at the meeting or, alternatively, the total
shareholdings of the disinterested shareholders who vote against the transaction
must not represent more than one percent of the voting rights in the company.

     Under the Israeli Companies Law, a shareholder has a duty to act in good
faith towards the company and other shareholders and refrain from abusing his or
her power in the company, including, among other things, voting in the general
meeting of shareholders on the following matters:

     o    any amendment to the articles of association;

     o    an increase of the company's authorized share capital;

     o    a merger; or

     o    approval of related party transactions that require shareholder
          approval.

     In addition, any controlling shareholder, any shareholder who can determine
the outcome of a shareholder vote and any shareholder who, under the company's
articles of association, can appoint or prevent the appointment of an office
holder, is under a duty to act with fairness towards the company. A recent
amendment to the Israeli Companies Law provides that a breach of the duty of
fairness will be governed by the laws governing breach of contract. The Israeli
Companies Law does not describe the substance of this duty.


                                       49
<PAGE>


INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATIONS ON LIABILITY

     Israeli law permits a company to insure an office holder in respect of
liabilities incurred by him with respect to actions performed in the capacity of
an office holder as a result of:

     o    the breach of his duty of care to the company or to another person

     o    the breach of his fiduciary duty to the company, to the extent that he
          acted in good faith and had reasonable cause to believe that the act
          would not prejudice the company, and

     o    monetary liabilities

     Moreover, a company can indemnify an office holder in connection with his
activities as an office holder for:

     o    monetary liabilities imposed upon him in favor of other persons
          pursuant to a court judgment, including a settlement or an
          arbitrator's decision approved by a court, and

     o    reasonable litigation expenses, including attorneys' fees, actually
          incurred by him or imposed upon him by a court, in an action, suit or
          proceeding brought against him by or on behalf of the company or other
          persons, or in a criminal action in which he was acquitted, or in a
          criminal action which does not require criminal intent in which he was
          convicted.

     Our articles of association allow us to insure and indemnify office holders
to the fullest extent permitted by law provided such insurance or
indemnification is approved by the audit committee and otherwise as required by
law. We have acquired directors' and officers' liability insurance covering the
officers and directors of the LanOptics and its subsidiaries for certain claims.
In addition, we have entered into agreements with our office holders to
indemnify them against certain types of claims, subject to dollar limits and
other limitations. These agreements have been ratified by our audit committee,
board of directors and shareholders.

INTERNAL AUDITOR

     The Israeli Companies Law also requires the board of directors of a public
company to appoint an internal auditor nominated by the audit committee. A
person who does not satisfy the Companies Law's independence requirements may
not be appointed as an internal auditor. The role of the internal auditor is to
examine, among other things, the compliance of the company's conduct with
applicable law and orderly business practice. Fahn Kanne Control Management
Ltd., a member of the Grant Thornton network, serves as our internal auditor.


                                       50
<PAGE>


D. EMPLOYEES

     On March 30, 2005, we had 80 employees: 3 LanOptics employees, and 77
EZchip employees. Six of EZchip's employees that are involved in sales and
marketing are in the U.S. Fifty-seven of EZchip's employees are engaged in
research and development. We believe that our company has good relations with
its employees and we have never experienced a labor dispute, strike or work
stoppage.

<TABLE>
<CAPTION>
                           As of December 31,
                         ----------------------
                         2002    2003      2004
                         ----    ----      ----
<S>                       <C>      <C>      <C>
LanOptics employees        3        3        3
EZchip employees          87       78       77
                          --       --       --
    Total employees       90       81       80
</TABLE>

     Israeli labor laws are applicable to our company's employees in Israel.
Such laws principally concern the length of the workday and the workweek,
minimum wages for workers, minimum annual leave, insurance for work-related
accidents, procedures for dismissing employees and determination of severance
pay. Israeli employers are also required to make payments to Israel's National
Insurance Institute with respect to employees. In addition, certain provisions
of the collective bargaining agreements between the "Histadrut" (Israel's
General Federation of Labor) and the Israeli Coordinating Bureau of Economic
Organization apply to the Company's employees in Israel pursuant to
administrative orders extending them to all private sector employees. According
to such administrative orders, all Israeli employers are required to provide
certain escalations of the wages in relation to the increases in the Israeli
consumer price index as well as to provide minimum annual payments so as to
cover vacation expenses. All of our employees are covered by comprehensive life
and pension insurance policies.

     All our officers, key employees and certain of our other employees are
party to individual employment agreements. We have entered into a non-disclosure
and non-competition agreement with each of our executive officers and key
employees.

     Pursuant to Israeli law, we are legally required to pay severance benefits
upon certain circumstances, including the retirement or death of an employee or
the termination of employment of an employee without due cause. All of our
employees are covered by life and/or pension insurance policies providing
customary benefits to employees, including retirement and severance benefits. We
contribute between 13.3% of base wages to such plans and employees contribute
between 5.0% to 5.5% of base wages. We also contribute between 5.0% and 7.5% of
base wages to certain "professional advancement" funds for managers, engineers
and others and such employees contribute 2.5% of base wages. Our contribution is
limited, up to the maximum amounts which are not considered taxable income to
the employee. Israeli employers and employees are required to pay predetermined
sums to the National Insurance Institute, which is similar to the United States
Social Security Administration. In the fiscal year ended December 31, 2004, the
aggregate payments to the National Insurance Institute amounted to approximately
16.31% of base wages, with the employee contributing 10.38 % (of which
approximately 4.80 % relates to payments for national health insurance) and the
employer contributing the remainder.


                                       51
<PAGE>


E. SHARE OWNERSHIP

BENEFICIAL OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS

     As of March 30, 2005, all the directors and executive officers as a group
beneficially held 851, 585 of our ordinary shares (approximately 7.4% of our
outstanding shares). This figure includes 610,596 shares beneficially owned by
Eli Fruchter, representing approximately 5.7% of our outstanding shares. Mr.
Fruchter is the only director or officer who holds 1% or more of our outstanding
shares as of March 30, 2005.

STOCK OPTION PLANS

LANOPTICS OPTION PLANS

     Since 1993, LanOptics has granted options to purchase ordinary shares to
key employees, directors and shareholders pursuant to the LanOptics 1992 Stock
Option Plan as an incentive to attract and retain qualified personnel. Under the
terms of these grants, options, generally, become exercisable ratably over a
four-year period commencing with the date of grant. The options generally expire
no later than six years from the date of the grant, and are non-transferable,
except under the laws of succession. LanOptics' 1992 Israeli Stock Option Plan
expired in November 2002. There were approximately 140,000 options for ordinary
shares that remained unissued upon the expiration of the 1992 Plan.

     On October 2003 LanOptics adopted the 2003 Israeli Share Option Plan (the
"2003 Israel Plan"), under which a total of 90,000 ordinary shares of the
Company were reserved and authorized for the purpose of the option plan. The
2003 Israel Plan is administered by the Board of Directors, which has broad
discretion, subject to certain limitations, to determine the persons entitled to
receive options, the terms and conditions on which options are granted and the
number of shares subject to each grant. Options under the 2003 Israel Plan are
issued to Israeli employees, directors, consultants, advisers and service
providers of the Company and its subsidiaries. In accordance with the terms and
conditions imposed by Section 102 of the Israel Income Tax Ordinance, grantees
that receive options under the 2003 Israel Plan are afforded certain tax
benefits (excluding controlling shareholders of the Company or those who are not
employees or directors of the Company). The Company has elected the benefits
available under the "capital gains" alternative. There are various conditions
that must be met in order to qualify for these benefits, including registration
of the options in the name of a trustee for each of the employees who is granted
options. Each option, and any ordinary shares acquired upon the exercise of the
option, must be held by the trustee for a period commencing on the date of grant
and ending no earlier than 24 months after the end of the tax year in which the
option was granted and deposited in trust with the trustee. The 2003 Israel Plan
provides for the options granted to have a maximum exercise period of ten years
from the date of grant. Options granted under the 2003 Israel Plan are generally
exercisable over four years. Options that are not exercised will become
available for further grant by the Board under the 2003 Israel Plan.

     As of March 30, 2005, there were outstanding options to purchase 306,239
ordinary shares. Of these options, 281,239 options were exercisable at exercise
prices ranging from $2.50 to $6.93 per share. The number of options held by
directors and officers of the Company as a group was 300,989, including options
to purchase 194,739 ordinary shares held by Mr. Burstin.


                                       52
<PAGE>


EZCHIP OPTION PLANS

     Since 2000, EZchip has granted options to purchase its ordinary shares to
key employees, shareholders and directors pursuant to the Israeli and the U.S.
stock option plans (the "2000 Section 102 Share Option Plan", the "2003 Section
102 Share Option Plan" and the "2001 U.S. Stock Option Plan"), as an incentive
to attract and retain qualified personnel. Under these plans a total of
11,500,000 ordinary shares of EZchip are reserved and authorized for issuance.
Under the terms of these grants, options generally become exercisable over a
four-year period, commencing with the date of grant. The options generally
expire 7 to 10 years from the date of the grant, and are non-transferable,
except under the laws of succession. As of March 30, 2005, there were
outstanding options to purchase ordinary shares of EZchip representing
approximately 13.5% of the share capital of EZchip on an as converted and fully
diluted basis. Approximately 20% of these options were held by directors and
officers of our company.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. MAJOR SHAREHOLDERS

     The following table sets forth certain information as of March 30, 2005
concerning the only persons or entities known to us to own beneficially more
than 5% of our company's outstanding ordinary shares:

<TABLE>
<CAPTION>
                                                    NUMBER OF
NAME                                               SHARES(1)(2)     PERCENT
----                                               ------------     -------
<S>                                                  <C>               <C>
Eli Fruchter                                         610,596           5.7%
Satellite Strategic Finance Associates, LLC          620,000           5.8%
</TABLE>


     (1)  The number of ordinary shares beneficially owned includes the shares
          issuable pursuant to stock options that are exercisable within 60 days
          of March 31, 2004. Shares issuable pursuant to stock options are
          deemed outstanding for computing the percentage of the person holding
          such options but are not outstanding for computing the percentage of
          any other person.

     (2)  Based on the most recent 13G and 13D filings.

     According to our transfer agent, as of March 30, 2005, there were 46
holders of record of our ordinary shares, including 37 holders of record
residing in the United States holding 9,783,633 ordinary shares, or 92.0% of the
aggregate number of ordinary shares outstanding. We believe that as of such date
we had over 5,500 beneficial shareholders.


                                       53
<PAGE>

RELATED PARTY TRANSACTIONS

     During the years ended December 31, 2002, 2003 and 2004 we paid $79,000,
$123,000 and $0, respectively to Naschitz, Brandes & Co., a law firm in which
Mr. Hanina Brandes, who was a principal shareholder of the Company until
December 2003, is a senior partner. See Item 7C. "Interests of Experts and
Counsel."

     In May 2003, LanOptics executed an agreement with all of EZchip's major
shareholders. Pursuant to the agreement, EZchip's shareholders were granted an
option to exchange all their shares in EZchip for ordinary shares of LanOptics,
subject to the fulfillment of certain conditions. The exchange ratio will be
calculated according to a formula determined by the parties, and will apply to
all series of EZchip's shares without regard to any preferences of such shares.
This option will expire upon the earlier of an initial public offering of
EZchip's securities and the sale of all or substantially all of EZchip's assets
or securities. We have not recorded this option in our books, since it is not
considered as a liability.

     In early 2003, EZchip raised $13.5 million in a private placement of Series
C Preferred shares, of which amount we invested $2.3 million. The terms of the
Series C Preferred share financing also provided the investors in the private
placement with an option to invest up to another $8 million in the future. This
option was exercised on March 9, 2004, resulting in a follow-on Series C
Preferred share investment in EZchip in the amount of $8 million, of which we
invested $5.3 million.

ITEM 8. FINANCIAL INFORMATION

A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

     The financial statements included under "Item 18. Financial Statements and
Exhibits" are incorporated herein by reference.

     The Financial Statement Schedules listed under the Rules of the Securities
and Exchange Commission but not included herein are omitted either because they
are not applicable, they are not required under the provisions of Regulation S-X
or the required information is included in the Consolidated Financial Statements
or the related notes thereto.

LEGAL PROCEEDINGS

     We are not a party to any litigation, other than litigation in the ordinary
course of business, which in the aggregate is not material to the business of
our company, and we are not aware of any threatened litigation, which in the
aggregate would be material to the business of the company.

DIVIDEND POLICY

     We anticipate that we will retain any future earnings to support operations
and to finance the growth and development of our business. In addition,
tax-exempt income attributable to our status as an approved enterprise under
Israeli tax law can be distributed to shareholders without subjecting us to
taxes only upon the complete liquidation of our company. Tax will be levied if
we decide to distribute such income in the future. Currently, we intend to
reinvest the amount of our tax-exempt income.


                                       54
<PAGE>


SIGNIFICANT CHANGES

     Except as otherwise disclosed in this Annual Report, there has been no
material change in our financial position since December 31, 2003.

ITEM 9. OFFER AND LISTING

A. LISTING DETAILS

     Our ordinary shares are quoted on the Nasdaq SmallCap Market (prior to
April 14, 2003, the Company's ordinary shares were traded on The Nasdaq National
Market) and on the Tel Aviv Stock Exchange under the symbol "LNOP". Our listing
on the Tel Aviv Stock Exchange was accomplished pursuant to special dual listing
rules applicable to companies that are traded on Nasdaq.

     Set forth below for each of the years indicated are the range of high and
low Nasdaq sales prices for our ordinary shares as reported by Nasdaq, and the
high and low sales prices (in U.S. dollars) on the Tel Aviv Stock Exchange since
April 1, 2002. Stock prices on the Tel Aviv Stock Exchange are quoted in New
Israeli Shekels (NIS); the stock prices set forth below in U.S. dollars reflect
the translation into U.S. dollars based on the rate of exchange published by the
Bank of Israel on the dates in question.

<TABLE>
<CAPTION>
                     NASDAQ            TEL AVIV STOCK EXCHANGE
               -------------------      --------------------
YEAR            HIGH         LOW         HIGH         LOW
----           -------     -------      -------     -------
<C>            <C>          <C>         <C>          <C>
1999           $ 7.18       $ 1.75          --           --
2000           $43.75       $ 5.50          --           --
2001           $19.25       $ 2.70          --           --
2002           $16.45       $ 3.97      $14.86       $ 6.16
2003           $11.20       $ 3.88      $11.10       $ 4.78
2004           $15.17       $ 4.77      $14.79       $ 5.22
</TABLE>


                                       55
<PAGE>

QUARTERLY STOCK INFORMATION

     The following table sets forth, for each of the full financial quarters in
the years indicated, the range of high ask and low bid prices of our ordinary
shares on the Nasdaq Market and the Tel Aviv Stock Exchange:

<TABLE>
<CAPTION>
                                     NASDAQ          TEL AVIV STOCK EXCHANGE
                              -------------------    -----------------------
2002                           HIGH         LOW         HIGH         LOW
----                          -------     -------      -------     -------
<S>                           <C>         <C>          <C>         <C>
First quarter                 $ 14.00     $  6.07
Second quarter                  16.45        5.02      $14.864     $ 8.995
Third quarter                    8.98        5.95        9.569       6.836
Fourth quarter                   7.60        3.79        7.080       6.160

2003
----
First quarter                 $   6.2     $  3.88      $  6.86     $  4.78
Second quarter                   8.33        4.47         8.17        4.86
Third quarter                    9.80        6.41        10.05        7.23
Fourth quarter                  11.20        8.50        11.10        8.94

2004
----
First quarter                 $ 15.17     $  7.11      $ 12.12     $  7.95
Second quarter                   8.90        4.77         9.58        5.55
Third quarter                    9.80        6.41         6.77        5.22
Fourth quarter                  11.20        8.50        14.79        7.20

MONTHLY STOCK INFORMATION

2004
----
October                       $ 10.97     $  7.11      $ 10.44     $  7.20
November                        14.47        9.23        13.94       10.37
December                        15.17       10.64        14.79       11.15

2005
----
January                       $ 14.90     $  9.75      $ 14.41     $ 10.35
February                        11.50        7.79        11.37        8.12

March (thru March 30)         $  9.10     $  7.02      $  9.44     $  7.60
</TABLE>



                                       56
<PAGE>


ITEM 10. ADDITIONAL INFORMATION

A. MEMORANDUM AND ARTICLES OF ASSOCIATION

OBJECTS AND PURPOSES OF THE COMPANY

     We are registered under the Israel Companies Law as a public company with
the name LanOptics Ltd. and registration number 52-003806-8. The objective
stated in our memorandum of association is to engage in any lawful activity.

POWERS OF THE DIRECTORS

     Pursuant to the Israeli Companies Law and our articles of association, a
director is generally not permitted to participate in the discussion of, or to
vote on, a proposal, arrangement or contract in which he has a personal
interest. Also, the directors may not vote compensation to themselves or any
members of their body without the approval of our audit committee and our
shareholders at a general meeting. The requirements for approval of certain
transactions are set forth above in "Item 6. Directors, Senior Management and
Employees; Directors and Senior Management; Approval of Certain Transactions."
The power of our directors to enter into borrowing arrangements on our behalf is
limited to the same extent as any other transaction by us.

RIGHTS ATTACHED TO ORDINARY SHARES

     Our authorized share capital consists of 30,000,000 ordinary shares, par
value NIS 0.02 per share. Holders of ordinary shares have one vote per share,
and are entitled to participate equally in the payment of dividends and share
distributions and, in the event of our liquidation, in the distribution of
assets after satisfaction of liabilities to creditors. No preferred shares are
currently authorized. All outstanding ordinary shares are validly issued and
fully paid. The rights of our ordinary shares may be cancelled, added to,
restricted, amended or otherwise altered with a vote of the holders of at least
75% of the outstanding ordinary shares voting at a duly convened shareholders'
meeting.

TRANSFER OF SHARES AND NOTICES

     Fully paid ordinary shares are issued in registered form and may be freely
transferred under our articles of association unless the transfer is restricted
or prohibited by another instrument. Under Israeli law and our articles of
association, each shareholder of record is entitled to receive at least 21 days'
prior notice of any shareholders' meeting. For purposes of determining the
shareholders entitled to notice and to vote at such meeting, the Board of
Directors may fix the record date, which shall be not more than forty nor less
than four days prior to the date of the meeting.


                                       57
<PAGE>


DIVIDEND AND LIQUIDATION RIGHTS

     We may declare a dividend to be paid to the holders of ordinary shares
according to their rights and interests in our profits. In the event of our
liquidation, after satisfaction of liabilities to creditors, our assets will be
distributed to the holders of ordinary shares in proportion to the nominal value
of their holdings. This right may be affected by the grant of preferential
dividend or distribution rights to the holders of a class of shares with
preferential rights that may be authorized in the future. Pursuant to Israel's
securities laws, a company registering its shares for trade on the Tel Aviv
Stock Exchange may not have more than one class of shares for a period of one
year following registration, after which it is permitted to issue preferred
shares, if the preference of those shares is limited to a preference in the
distribution of dividends and these preferred shares have not voting rights.
Under the Israeli Companies Law, the declaration of a dividend does not require
the approval of the shareholders of the company, unless the company's articles
of association require otherwise. Our articles of association provide that the
board of directors may declare and distribute interim dividends without the
approval of the shareholders, but the payment of a final dividend requires
shareholder approval.

ANNUAL AND EXTRAORDINARY GENERAL MEETINGS

     We must hold our annual general meeting of shareholders each year no later
than 15 months from the last annual meeting, at a time and place determined by
the board of directors, upon at least 21 days' prior notice to our shareholders.
A special meeting may be convened by request of two directors or by written
request of one or more shareholders holding at least 5% of our issued share
capital and 1% of the voting rights or one or more shareholders holding at least
5% of the voting rights. Shareholders requesting a special meeting must submit
their proposed resolution with their request.

     The quorum required for a meeting of shareholders consists of at least two
shareholders present in person or by proxy who hold at least 50% of the issued
share capital. 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 any time and
place as the Chairman may determine with the consent of the holders of a
majority of the voting power represented at the meeting in person or by proxy
and voting on the question of adjournment. At the reconvened meeting, the
required quorum consists of any two members present in person or by proxy.

VOTING RIGHTS

     Our ordinary shares do not have cumulative voting rights in the election of
directors. As a result, the holders of ordinary shares that represent more than
50% of the voting power represented at a shareholders meeting have the power to
elect all of our directors, except the outside directors whose election requires
a special majority.

     Holders of ordinary shares have one vote for each Ordinary Share held on
all matters submitted to a vote of shareholders. Shareholders may vote in person
or by proxy. These voting rights may be affected by the grant of any special
voting rights to the holders of a class of shares with preferential rights that
may be authorized in the future.


                                       58
<PAGE>


     Under the Companies Law, all shareholders' meetings require prior notice of
at least 21 days. Our articles of association provide that most decisions may be
made by a simple majority, although certain resolutions, referred to as special
resolutions (for example, changes to the articles of association) require
approval of at least 75% of the shares present and voting on the matter. See
"Item 6. Directors, Senior Management and Employees; Directors and Senior
Management; Approval of Certain Transactions; Obligations of Directors, Officers
and Shareholders" above for certain duties of shareholders towards the company.

LIMITATIONS ON THE RIGHTS TO OWN SECURITIES

     The ownership or voting of ordinary shares by non-residents of Israel is
not restricted in any way by our articles of association or the laws of the
State of Israel, except that nationals of countries which are, or have been, in
a state of war with Israel may not be recognized as owners of ordinary shares.

ANTI-TAKEOVER PROVISIONS UNDER ISRAELI LAW

     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 hold more than 25% of the voting rights in the
company, unless there is already another shareholder of the company with 25% or
more of the voting rights. 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 hold more than 45%
of the voting rights in the company, unless there is a shareholder with 45% or
more of the voting rights in the company. These rules do not apply if the
acquisition is made by way of a merger. Regulations promulgated under the
Companies Law provide that these tender offer requirements do not apply to
companies whose shares are listed for trading outside of Israel if, according to
the law in the country in which the shares are traded, including the rules and
regulations of the stock exchange or which the shares are traded, either:

     o    there is a limitation on acquisition of any level of control of the
          company; or

     o    the acquisition of any level of control requires the purchaser to do
          so by means of a tender offer to the public.

     Finally, in general, Israeli tax law treats stock-for-stock acquisitions
less favorably than does U.S. tax law. Israeli tax law has been amended to
provide for tax deferral in specified acquisitions, including transactions where
the consideration for the sale of shares is the receipt of shares of the
acquiring company. Nevertheless, Israeli tax law may subject a shareholder who
exchanges his ordinary shares for shares in a foreign corporation to immediate
taxation or to taxation before his investment in the foreign corporation becomes
liquid.


                                       59
<PAGE>


EXEMPTION FROM NASDAQ CORPORATE GOVERNANCE RULES

     In accordance with Rule 4350(a)(1) of the Rules of Corporate Governance of
The Nasdaq Stock Market, Inc., we have received an exemption from the
requirement to distribute an annual report to our shareholders prior to our
annual general meeting of shareholders. The basis for the exemption is the fact
that the generally accepted business practice in Israel, where we are
incorporated, is not to distribute an annual report to shareholders. We post our
Annual Report on Form 20-F on our Website (www.lanoptics.com) promptly following
the filing of the Annual Report with the Securities and Exchange Commission.

EXCHANGE CONTROLS

     Non-residents of Israel who purchase our ordinary shares may freely convert
all amounts received in Israeli currency in respect of such ordinary shares,
whether as a dividend, as a liquidating distribution or as proceeds from the
sale of the ordinary shares, into freely-repatriable non-Israeli currencies at
the rate of exchange prevailing at the time of conversion (provided in each case
that the applicable Israeli income tax, if any, is paid or withheld). Israeli
residents are also eligible to purchase ordinary shares.

     Until May 1998, Israel imposed extensive restrictions on transactions in
foreign currency. These restrictions were largely lifted in May 1998. Since
January 1, 2003 all exchange control restrictions have been eliminated (although
there are still reporting requirements for foreign currency transactions).
Legislation remains in effect, however, pursuant to which currency controls can
be imposed by administrative action at any time.

TAXATION

ISRAELI TAX CONSIDERATIONS

     The following contains a discussion of certain Israeli tax consequences to
U.S. Shareholders (as defined below under "U.S. Federal Income Tax
Considerations") of ordinary shares. To the extent that the discussion is based
on new tax legislation that has not been subject to judicial or administrative
relevant interpretation, there can be no assurance that the views expressed in
the discussion will be accepted by the tax authorities. This discussion is not
intended, and should not be construed, as legal or professional tax advice and
is not exhaustive of all possible tax considerations.

TAX REFORM

     On January 1, 2003, the Law for Amendment of the Income Tax Ordinance
(Amendment No.132), 2002, or the Tax Reform, came into effect, following its
enactment by the Israeli Parliament on July 24, 2002. On December 17, 2002, the
Israeli Parliament approved a number of amendments to the Tax Reform, which came
into effect on January 1, 2003. Other regulations and decrees relating to the
Tax Reform were executed as well.


                                       60
<PAGE>

     The Tax Reform, aimed at broadening the categories of taxable income and
reducing the tax rates imposed on employment income, introduced the following,
among other things:

     o    Reduction of the tax rate levied on capital gains (other than gains
          deriving from the sale of listed securities) derived after January 1,
          2003, to a general rate of 25% for both individuals and corporations.
          Regarding assets acquired prior to January 1, 2003, the reduced tax
          rate will apply to a proportionate part of the gain, in accordance
          with the holding periods of the asset, before or after January 1,
          2003, on a linear basis;

     o    Re-defining "residency" for tax purposes. A company's residency for
          tax purposes is determined, as of January 1 2003, according to its
          place of organization (instead of the company's place of registration
          and main activity). This test was legislated additionally to the
          control and management test, which has been applied prior to the Tax
          Reform.

     o    Imposition of Israeli tax on all income of Israeli residents,
          individuals and corporations, regardless of the territorial source of
          income, including income derived from passive sources such as
          interest, dividends and royalties;

     o    Introduction of controlled foreign corporation, or CFC, rules into the
          Israeli tax structure. Generally under such rules, an Israeli resident
          who holds, directly or indirectly, 10% or more of the rights in a
          foreign corporation whose shares are not publicly traded, in which
          more than 50% of rights are held directly or indirectly by Israeli
          residents, which has undistributed profits a majority of whose income
          in a tax year is considered passive income, and the income tax rate is
          less then 20% abroad, will be liable for tax on the portion of such
          income attributed to his holdings in such corporation, as if such
          income were distributed to him as a dividend;

     o    Imposition of capital gains tax on capital gains realized by
          individuals as of January1, 2003, from the sale of shares of publicly
          traded companies (which was previously exempt from capital gains tax
          in Israel). For information with respect to the applicability of
          Israeli capital gains taxes on the sale of ordinary shares, see
          "Capital Gains Tax applicable to Shareholders" below;

     o    Introduction of a new regime for the taxation of shares and options
          issued to employees and officers (including directors).

STATUTORY CORPORATE TAX RATE

     Israeli companies are generally subject to corporate tax on their taxable
income at a rate of 35% ( in the 2004 tax year), 34% (in the 2005 tax year), 32%
(in the 2006 tax year) and 30% (in and after the 2007 tax year. In the Company's
case, as described below, the rate is currently effectively reduced.


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TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

     EZchip's facilities have been granted approved enterprise status pursuant
to the Law for the Encouragement of Capital Investments, 1959 or the "Investment
Law", which provides certain tax and financial benefits to investment programs
that have been granted such status.

     The Investment Law provides that a proposed capital investment in eligible
facilities may, upon application to the Investment Center of the Ministry of
Industry, Labor and Trade of the State of Israel, 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 pursuant to the program.

     A company owning an approved enterprise may elect to receive either
governmental grants or an alternative package of tax benefits. Under the
alternative package, a company's undistributed income derived from an approved
enterprise will be exempt from corporate tax for a period of two to ten years
(depending on the geographic location of the approved enterprise within Israel).
The exemption commences in the first year of taxable income, and taxed at a
reduced corporate tax of 10% to 25% for the following five to eight years,
depending on the extent of foreign shareholders' ownership of the company's
ordinary shares. The benefits period is limited to twelve years from completion
of the investment under the approved plan or fourteen years from the date of
approval, whichever is earlier. A Foreign Investors Company, or "FIC", defined
in the Investment Law as a company of which more than 25% of its shareholders
are non-Israeli residents, may enjoy benefits for a period of up to ten years,
or twelve years if it complies with certain export criteria stipulated in the
Investment Law (the actual length of the benefits period is graduated based on
the percentage of foreign ownership). The tax benefits relate only to taxable
income attributable to specific approved enterprises. 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.

     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. A company that has elected the alternative package of
benefits and pays a dividend out of income derived from the approved enterprise
during the exemption period will be subject to tax on the amount distributed, at
the rate that would have been applicable had it not elected the alternative
package of benefits (generally, 10%-25% depending on the extent of foreign
investment in the company). The Company currently intends to reinvest the amount
of its tax-exempt income and not to distribute such income as a dividend.
Dividends from approved enterprises are taxable at the reduced rate of 15% if
distributed during the tax exemption period or within twelve years thereafter
(this time limit does not apply to an FIC).

     EZchip has derived, and expects to continue to derive, a substantial
portion of its operating income from its approved enterprise facilities. The tax
benefits attributable to the current approved enterprise are scheduled to expire
in 2013.


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<PAGE>


     The Investment Center of the Ministry of Industry, Labor and Trade bases
its decision as to whether to approve or reject an application for designation
as an approved enterprise, on the criteria set forth in the Investment Law and
related regulations, the then prevailing policy of the Investment Center, and
the specific objectives and financial criteria of the applicant. Accordingly,
there can be no assurance that any such application will be approved. In
addition, the benefits available to an approved enterprise are conditional upon
the fulfillment of conditions stipulated in the Investment Law and related
regulations and the criteria set forth in the specific certificate of approval.
In the event that a company does not meet these conditions, it would be required
to refund the amount of tax benefits, together with a linkage adjustment to the
Israeli consumer price index and interest.

     The Investment Law and regulations prescribing the benefits provide for an
expiration date for the grant of new benefits. The expiration date has been
extended several times in the past. The expiration date currently in effect is
March 31, 2005 (which may be extended by ministerial decision until June 30,
2005), and no new benefits will be granted after that date unless the expiration
date is extended again. There can be no assurance that new benefits will be
available after March 31, 2005 or that existing benefits will be continued in
the future at their current level or at any level. Various proposals have been
put forth for new legislation to replace the Investment Law. We are not able to
predict whether or when this new legislation will be enacted, nor can we predict
the nature and scope of benefits that may be available under any new law.

SPECIAL PROVISIONS RELATING TO MEASUREMENT OF TAXABLE INCOME

     We measures our taxable income in accordance with the Income Tax Law
(Inflationary Adjustments), 1985, or the Inflationary Adjustments Law, which
represents an attempt to overcome the problems presented to a traditional tax
system by an economy undergoing rapid inflation. Results of the Company for tax
purposes are measured in terms of earning in NIS after certain adjustments for
changes in the Israeli consumer price index. The Inflationary Adjustments Law is
highly complex.

CAPITAL GAINS TAX APPLICABLE TO 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.

     Regulations promulgated under the Israeli Income Tax Ordinance provided for
an exemption from Israeli capital gains tax for gains accrued before January 1,
2003 and derived from the sale of shares of an "industrial company," as defined
by the Law for the Encouragement of Industry (Taxation), 1969, that are traded
on specified non-Israeli markets, including The Nasdaq National Market. We
believe that beginning from tax year 2002, the company has not been classified
as an "industrial company." Another exemption may be available, however, because
our shares became dual listed on the Tel-Aviv Stock Exchange in 2002.
Shareholders are advised to consult their tax advisors regarding the
availability of the exemption.


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<PAGE>


     On January 1, 2003, 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. The tax basis of shares acquired prior to January 1,
2003 will be determined as the higher between the original price paid for the
share and the average closing share price in the three trading days preceding
January 1, 2003. Non-Israeli residents shall be exempt from Israeli capital
gains tax on any gains derived from the sale of shares publicly traded on the
Nasdaq SmallCap Market, provided such shareholders did not acquire their shares
prior to an initial public offering. A non Israeli company won't be allowed to
enjoy the tax exempt if its controlling shareholder is an Israeli or whether 25%
of its shares are held by an Israeli. In any event, the provisions of the tax
reform shall not affect the exemption from capital gains tax for gains accrued
before January 1, 2003, as described in the previous paragraph.

     The above rules regarding the taxation of capital gains do not apply to:
(1) dealers in securities; (2) in certain cases, shareholders who report in
accordance with the Inflationary Adjustment Law; or (3) shareholders who
acquired their shares prior to the company's initial public offering.

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

TAXATION OF NON-RESIDENT SHAREHOLDERS ON ORDINARY INCOME

     Non-residents of Israel are subject to Israeli income tax on ordinary
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. If the dividends are distributed out of
approved enterprise earnings, the applicable tax rate would be 15%. Under the
United States-Israel Tax Treaty, the maximum tax on dividends paid to a holder
of ordinary shares who is a Treaty United States Resident will be 25%, however,
the tax rate is reduced to 12.5% for dividends not generated by an approved
enterprise to a corporation which holds 10% or more of the company's voting
power during a certain period preceding the distribution of the dividend.
Dividends derived from an approved enterprise will still be subject to 15% tax
withholding.


                                       64
<PAGE>


     Under a recent amendment to the Inflationary Adjustments Law, non-Israeli
corporations might be subject to Israeli taxes on the sale of traded securities
of an Israeli company, subject to the provisions of any applicable double
taxation treaty.

STAMP TAX

     Under Israel's Stamp Tax on Documents Law, certain documents are subject to
stamp tax. Recently promulgated regulations provide for a gradual phase-out of
the stamp tax by 2008. In 2004, however, the tax authorities began an
enforcement campaign involving extensive audits of companies' compliance with
the stamp tax obligation with respect to all agreements which had been signed
since June 2003.

     The Company has received legal advice that there are a variety of defenses
relating to the obligation to pay stamp tax or to the amount to be paid. In
addition, the Israeli Forum of CFOs has filed a petition with the Israeli
Supreme Court against enforcement of the law, and this petition is currently
pending. If the Forum of CFOs' petition is rejected and the tax authorities do
not accept the Company's defenses, the Company may be liable to pay stamp tax
with respect to the period beginning June 1, 2003.

     The Company's management believes that applicable provision in the
financial statements as of December 31, 2004, is adequate to cover probable
costs arising from this matter.

U.S. FEDERAL INCOME TAX CONSIDERATIONS

     The following summary sets forth the material U. S. federal income tax
consequences applicable to the following persons who purchase, hold or dispose
of the ordinary shares ("U.S. Shareholders"): (i) citizens or residents (as
defined for U.S. federal income tax purposes) of the United States; (ii)
corporations, or other entities taxable as corporations for U.S. federal income
tax purposes, created or organized in or under the laws of the United States or
any political subdivision thereof; (iii) estates, the income of which is subject
to U. S. federal income taxation regardless of its source; and (iv) trusts, if
(a) a U.S. court is able to exercise primary supervision over its administration
and (b) one or more U.S. persons have the authority to control all of its
substantial decisions. This discussion is based on the provisions of the U. S.
Internal Revenue Code of 1986, as amended, or the Code, U. S. Treasury
Regulations promulgated thereunder and administrative and judicial
interpretations thereof, all as in effect as of the date of this Annual Report,
and all of which are subject to change either prospectively or retroactively.
This discussion generally considers only U.S. Shareholders that will hold the
ordinary shares as capital assets for U.S. federal income tax purposes and does
not consider (a) all aspects of U.S. federal income taxation that may be
relevant to particular U.S. Shareholders by reason of their particular
circumstances (including potential application of the alternative minimum tax),
(b) U.S. Shareholders subject to special treatment under the U.S. federal income
tax laws, such as financial institutions, insurance companies, broker-dealers,
tax-exempt organizations, (c) U.S. Shareholders owning, directly or by
attribution, 10% or more of the LanOptics' outstanding voting shares, (d) U.S.
Shareholders who hold the ordinary shares as part of a hedging, straddle or
conversion transaction, or appreciated financial position, (e) U.S. Shareholders
who acquire their ordinary shares in a compensatory transaction, (f) U.S.
Shareholders whose functional currency is not the U.S. dollar, or (g) any aspect
of state, local or non-U. S. tax law.


                                       65
<PAGE>


     If a partnership or an entity treated as a partnership for U.S. federal
income tax purposes owns ordinary shares, the U.S. federal income tax treatment
of a partner in such a partnership will generally depend upon the status of the
partner and the activities of the partnership. A partnership that owns ordinary
shares and the partners in such partnership should consult their tax advisors
about the U.S. federal income tax consequences of holding and disposing of
ordinary shares.

     THE FOLLOWING SUMMARY DOES NOT ADDRESS THE IMPACT OF A U.S. SHAREHOLDER'S
INDIVIDUAL TAX CIRCUMSTANCES. ACCORDINGLY, EACH U.S. SHAREHOLDER SHOULD CONSULT
HIS OR HER TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF AN
INVESTMENT IN THE ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE,
LOCAL OR NON-U.S. TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.

DISTRIBUTIONS PAID ON THE ORDINARY SHARES

     A U.S. Shareholder generally will be required to include in gross income as
dividend income, the amount of any distributions paid in respect of the ordinary
shares (including the amount of any Israeli taxes withheld therefrom) to the
extent that such distributions are paid out of the LanOptics' current or
accumulated earnings and profits as determined for U.S. federal income tax
purposes. Distributions in excess of such earnings and profits will be treated
first as a non-taxable return of capital reducing the U.S. Shareholder's tax
basis in the ordinary shares to the extent of the distributions, and then as
capital gain from a sale or exchange of such ordinary shares. Such dividends
will generally not qualify for the dividends received deduction available to
corporations. The amount of any cash distribution paid in NIS will equal the
U.S. dollar value of the distribution, calculated by reference to the spot
exchange rate in effect on the date of the distribution, regardless of whether
the payment is in fact converted into U.S. dollars on that day. A U.S.
Shareholder generally will recognize foreign currency gain or loss (which is
treated as ordinary income or loss from sources within the United States) upon
the subsequent disposition of the NIS.

     Subject to certain conditions and complex limitations, any Israeli tax
withheld or paid with respect to dividends on the ordinary shares will generally
be eligible for credit against a U.S. Shareholder's U. S. federal income tax
liability at such U.S. Shareholder's election. The Code provides limitations on
the amount of foreign tax credits that a U.S. Shareholder may claim, including
extensive separate computation rules under which foreign tax credits allowable
with respect to specific categories of income cannot exceed the U. S. federal
income taxes otherwise payable with respect to each such category of income.
U.S. Shareholders that do not elect to claim a foreign tax credit may instead
claim a deduction for Israeli income tax withheld or paid, but only for a year
in which such U.S. Shareholders elect to do so for all non-U.S. income taxes.
Dividends with respect to the ordinary shares will generally be classified as
foreign source "passive income" for the purpose of computing a U.S.
Shareholder's foreign tax credit limitations for U.S. foreign tax credit
purposes. U.S. Shareholders should note that recently enacted legislation
eliminates the "financial services income" category with respect to taxable
years beginning after December 31, 2006. Under this legislation, the foreign tax
credit limitation categories will be limited to "passive category income" and
"general category income." Further, there are special rules for computing the
foreign tax credit limitation of a taxpayer who receives dividends subject to a
reduced tax rate under the recently enacted amendments to the Code, see
discussion below. The rules relating to foreign tax credits are complex, and
each U.S. Shareholder should consult his or her tax advisor to determine whether
he or she would be entitled to this credit.


                                       66
<PAGE>


     Subject to certain limitations, "qualified dividend income" received by a
noncorporate U.S. Holder in tax years beginning on or before December 31, 2008
will be subject to tax at a reduced maximum tax rate of 15 percent.
Distributions taxable as dividends paid on the ordinary shares should qualify
for the 15 percent rate provided that either: (i) LanOptics is entitled to
benefits under the income tax treaty between the United States and Israel (the
"Treaty") or (ii) the ordinary shares are readily tradable on an established
securities market in the United States and certain other requirements are met.
We believe that LanOptics is entitled to benefits under the Treaty and that the
ordinary shares currently are readily tradable on an established securities
market in the United States. However, no assurance can be given that the
ordinary shares will remain readily tradable. The rate reduction does not apply
unless certain holding period requirements are satisfied. With respect to the
ordinary shares, the U.S. Holder must have held such shares for at least 61 days
during the 121-day period beginning 60 days before the ex-dividend date. The
rate reduction also does not apply to dividends received from passive foreign
investment companies, see discussion below, or in respect of certain hedged
positions or in certain other situations. The legislation enacting the reduced
tax rate contains special rules for computing the foreign tax credit limitation
of a taxpayer who receives dividends subject to the reduced tax rate. U.S.
Holders of ordinary shares should consult their own tax advisors regarding the
effect of these rules in their particular circumstances.

SALE, EXCHANGE OR OTHER DISPOSITION OF THE ORDINARY SHARES

     The sale, exchange or other disposition of ordinary shares will generally
result in the recognition of capital gain or loss in an amount equal to the
difference between the amount realized on the sale or exchange and the U.S.
Shareholder's tax basis in the ordinary shares (determined in U.S. dollars).
Such gain or loss generally will be long-term capital gain or loss if the U.S.
Shareholder's holding period of the ordinary shares exceeds one year at the time
of the disposition. Gain or loss recognized by a U.S. Shareholder on a sale or
exchange of ordinary shares generally will be treated as U.S. source gain or
loss for U.S. foreign tax credit purposes. Under the United States- Israel Tax
Treaty and Israel, gain derived from the sale, exchange or other disposition of
ordinary shares by a holder who is a resident of the United States for purposes
of the treaty and who sells the ordinary shares within Israel may be treated as
foreign source income for U.S. foreign tax credit purposes.

     In the case of a cash basis U.S. Shareholder who receives NIS in connection
with the sale or disposition of ordinary shares, the amount realized will be
based on the U.S. dollar value of the NIS received with respect to the ordinary
shares as determined on the settlement date of such exchange. A U.S. Shareholder
who receives payment in NIS and converts NIS into United States dollars at a
conversion rate other than the rate in effect on the settlement date may have a
foreign currency exchange gain or loss that would be treated as ordinary income
or loss.

     An accrual basis U.S. shareholder may elect the same treatment required of
cash basis taxpayers with respect to a sale or disposition of ordinary shares,
provided that the election is applied consistently from year to year. Such
election may not be changed without the consent of the Internal Revenue Service.
In the event that an accrual basis U.S. Shareholder does not elect to be treated
as a cash basis taxpayer (pursuant to the Treasury regulations applicable to
foreign currency transactions), such U.S. Shareholder may have a foreign
currency gain or loss for U.S. federal income tax purposes because of
differences between the U.S. dollar value of the currency received prevailing on
the trade date and the settlement date. Any such currency gain or loss would be
treated as ordinary income or loss and would be in addition to gain or loss, if
any, recognized by such U.S. Shareholder on the sale or disposition of such
ordinary shares.


                                       67
<PAGE>


PASSIVE FOREIGN INVESTMENT COMPANY STATUS

     For U.S. federal income tax purposes, a foreign corporation will be
classified as a passive foreign investment company (a "PFIC") if, for any
taxable year, either (i) 75% or more of its gross income in the taxable year is
passive income, or (ii) 50% or more of the average value of its gross assets in
the taxable year, calculated quarterly by value, produce or are held for the
production of, passive income. For this purpose, passive income includes
dividends, interest, royalties, rents, annuities and the excess of gain over
losses from the disposition of assets, which produce passive income.

     Although not free from doubt, based on our current and projected income,
assets and activities, we believe that we are not currently a PFIC nor do we
expect to become a PFIC in the foreseeable future. However, there can be no
assurance that we will not in fact be considered to be a PFIC for our current
taxable year or any other subsequent year because (i) the determination of
whether or not we are a PFIC will be based on the composition of our income and
assets and can be definitively made only after the end of each taxable year,
(ii) the value of our stock has been volatile historically, (iii) we own
substantial amount of assets such as cash and marketable securities which are
considered as passive asset for purposes of the PFIC rules and (iv) the legal
and financial analysis to determine whether a company is a PFIC is not entirely
clear. Therefore, there is no assurance that our belief regarding PFIC status
will not be challenged by the U.S. Internal Revenue Service, or the IRS, or that
a court will not sustain such challenge.

     If we were a PFIC for any taxable year during a U.S. Shareholder's holding
period, and the U.S. Shareholder did not timely elect to treat the Company as a
"qualified electing fund" under Section 1295 of the Code or elect to "mark to
market" the ordinary shares (each as discussed below), a U.S. Shareholder would
be subject to special tax rules on the receipt of an "excess distribution" on
the ordinary shares (generally, a distribution to the extent it exceeds 125% of
the average annual distributions in the prior three years) and on gain from the
disposition of the ordinary shares. Under these rules, the excess distribution
and any gain would be allocated ratably over the U.S. Shareholder's holding
period in the ordinary shares, the amount allocated to the current taxable year
and any taxable year prior to the first taxable year in which we are a PFIC
would be taxed as ordinary income, the amount allocated to each of the other
taxable years would be subject to tax at the highest marginal rate in effect for
the applicable class of taxpayer for that year, and an interest charge for the
deemed deferral benefit would be imposed on the resulting tax allocated to such
other taxable years. The tax liability with respect to amounts allocated to
years prior to the year of the disposition or "excess distribution" would not be
offset by any net operating losses. Additionally, if we are deemed to be a PFIC,
a U.S. Shareholder who acquires our ordinary shares from a decedent generally
will be denied the normally available step-up in tax basis to fair market value
for the ordinary shares at the date of the death, and instead will have a tax
basis equal to the decedent's tax basis if lower than fair market value.

     U.S. Shareholders may avoid taxation under the rules described above by
making (i) a "qualified electing fund" election for the first taxable year in
which we are a PFIC to include such U.S. Shareholder's share of our ordinary
earnings and net capital gain on a current basis or (ii) a "deemed sale"
election in a subsequent year, along with a qualified electing fund election, if
we are still classified as a PFIC. A qualified electing fund election remains in
effect until revoked by the IRS. You will not be to make a qualified electing
fund election unless we comply with certain applicable information reporting
requirements.


                                       68
<PAGE>


     U.S. Shareholders holding "marketable stock" (which we consider our
ordinary shares to be) in a PFIC may make an election to "mark-to-market" the
ordinary shares annually, rather than be subject to the above-described rules.
Under such election, the U.S. Shareholder will include in income each year any
excess of the fair market value of the PFIC stock at the close of each taxable
year over the U.S. Shareholder's adjusted basis in such stock. The U.S.
Shareholder will generally be allowed an ordinary deduction for the excess, if
any, of the adjusted basis of the PFIC stock over its fair market value as of
the close of the taxable year, or the amount of any net mark-to-market gains
recognized for prior taxable years, whichever is less. A U.S. Shareholder's
adjusted tax basis in the ordinary shares will generally be adjusted to reflect
the amounts included or deducted under the mark-to-market election.
Additionally, any amounts included in income pursuant to a mark-to-market
election, as well as gain on the actual sale or other disposition of the PFIC
stock, are treated as ordinary income. Ordinary loss treatment also applies to
any loss recognized on the actual sale or disposition of PFIC stock to the
extent that the amount of such loss does not exceed the net mark-to-market gains
previously included with respect to such stock. An election to mark-to-market
generally will apply to the taxable year in which the election is made and all
subsequent taxable years.

     If a U.S. Shareholder makes one of these two elections, distributions and
gain generally will not be recognized ratably over the U.S. Shareholder's
holding period or be subject to an interest charge as described above. Further,
the denial of basis step-up at death described above generally will not apply. A
U.S. Shareholder making one of these two elections may experience current income
recognition, even if no cash is distributed by us.

     We will notify U.S. Shareholders in the event that we conclude that we will
be treated as a PFIC for any taxable year and will provide these U.S.
Shareholders with such information as is necessary to enable these U.S.
Shareholders to elect to treat us as a "qualified electing fund" for U.S.
federal income tax purposes or to elect to "mark-to-market" the ordinary shares.

     BOTH ELECTIONS ARE SUBJECT TO A NUMBER OF SPECIFIC RULES AND REQUIREMENTS,
AND U.S. SHAREHOLDERS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS
CONCERNING THESE ELECTIONS IF WE BECOME A PFIC.

BACKUP WITHHOLDING AND INFORMATION REPORTING

     Under certain circumstances, U.S information reporting and/or backup
withholding of U.S. federal income tax (currently at the rate of 28%) on
dividends received on, and the proceeds of the dispositions of, the ordinary
shares may apply to U.S. Shareholders. A backup withholding tax may apply to
such payments if the beneficial owner fails to provide a correct taxpayer
identification number to the paying agent and to comply with certain
certification procedures or otherwise establish an exemption from backup
withholding. Backup withholding tax will be allowed as a refund or credit
against the U.S. Shareholder's U.S. federal income tax liability, provided that
certain required information is furnished to the IRS.


                                       69
<PAGE>


DOCUMENTS ON DISPLAY

     We are subject to certain of the information reporting requirements of the
Securities and Exchange Act of 1934, as amended. We, as a "foreign private
issuer," are exempt from the rules and regulations under the Securities Exchange
Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders are exempt from the reporting and
"short-swing" profit recovery provisions contained in Section 16 of the
Securities Exchange Act, with respect to their purchase and sale of the ordinary
shares. In addition, we are not required to file reports and financial
statements with the Securities and Exchange Commission as frequently or as
promptly as U.S. companies whose securities are registered under the Securities
Exchange Act. However, we will file with the Securities and Exchange Commission
an annual report on Form 20-F containing financial statements audited by an
independent accounting firm. We will also furnish quarterly reports on Form 6-K
containing unaudited financial information after the end of each of the first
three quarters. In accordance with Rules of Corporate Governance of The Nasdaq
Stock Market, Inc., we have received an exemption from the requirement to
distribute an annual report to our shareholders prior to our annual general
meeting of shareholders. We post our Annual Report on Form 20-F on our Website
(www.lanoptics.com) promptly following the filing of our Annual Report with the
Securities and Exchange Commission

     You may read and copy any document we file with the SEC at its public
reference facilities at, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the SEC's regional office at 500 West Madison Street, Suite 1400, Chicago, IL
60661-2511. You may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC also maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. The address of this web site is
http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference facilities.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

GENERAL

     The currency of our primary economic environment is the dollar. However, we
have balances and activities in other currencies, mainly NIS. We are therefore
exposed to market risks arising from changes in currency exchange rates. We are
also exposed to market risks arising from changes in interest rates.

EXCHANGE RATE RISK MANAGEMENT

     Our functional currency and that of EZchip is the dollar. Accordingly, we
attempt to protect ourselves against exposure arising from the difference
between assets and liabilities in NIS and the dollar, or "Balance Sheet
Exposure". We strive to limit our exposure through "natural" hedging, i.e.,
attempting to maintain similar levels of assets and liabilities in any given
currency, to the extent possible. However, this method of "natural" hedging is
not always achievable.


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INTEREST RATE RISK MANAGEMENT

     Due to the existence of assets with different interest rates and maturity
dates, we are exposed to changes in interest rates. Currently Our portfolio is
composed mainly of (i) fixed income assets, including U.S. Government and
Corporate Obligations, rated A-AAA and bearing annual interest rates in the
range of 1.5% - 3.5%, with maturities in the range of 3 to 20 months; and (ii)
short term managed liquidity funds bearing annual interest rates in the range of
1.0% - 1.8%.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

                                 Not applicable.


                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

                                 Not applicable.

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

                                 Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

     Our management, including our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered
by this annual report on Form 20-F. Based upon that evaluation, our chief
executive officer and chief financial officer have concluded that, as of such
date, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by our company in reports that we file or
submit under the U.S. Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
was made known to them by others within the company, as appropriate to allow
timely decisions regarding required disclosure.

     There were no changes to our internal control over financial reporting that
occurred during the period covered by this annual report on Form 20-F that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

     All internal control systems no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective may not
prevent or detect misstatements and can provide only reasonable assurance with
respect to financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.


                                       71
<PAGE>


ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     Our Board of Directors has determined that Karen Sarid meets the definition
of an audit committee financial expert, as defined in Item 401 of Regulation
S-K.

ITEM 16B. CODE OF ETHICS

     We have adopted a code of ethics that applies to our chief executive
officer and all senior financial officers of our company, including the chief
financial officer, chief accounting officer or controller, or persons performing
similar functions. Written copies are available upon request. If we make any
substantive amendment to the code of ethics or grant any waivers, including any
implicit waiver, from a provision of the codes of ethics, we will disclose the
nature of such amendment or waiver on our website.

ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES

FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS

     The following table sets forth, for each of the years indicated, the fees
paid to our independent public accountants and the percentage of each of the
fees out of the total amount paid to the accountants.

<TABLE>
<CAPTION>
                                  Year Ended December 31,
                        -------------------------------------------
                                2003                   2004
                        -------------------    --------------------
Services Rendered        Fees   Percentages     Fees    Percentages
----------------------  ------- -----------    ------  ------------
<S>                     <C>         <C>        <C>         <C>
Audit (1)               $35,000      58%       $48,000      71%
Audit-related (2)       $20,000      33%       $20,000      29%
Tax (3)                 $ 5,000       9%       $    --      --
Total                   $60,000     100%       $68,000     100%
</TABLE>

     (1)  Audit fees consist of services that would normally be provided in
          connection with statutory and regulatory filings or engagements,
          including services that generally only the independent accountant can
          reasonably provide.

     (2)  Audit-related fees relate to assurance and associated services that
          traditionally are performed by the independent accountant, including:
          attest services that are not required by statute or regulation;
          accounting consultation and audits in connection with mergers,
          acquisitions and divestitures; employee benefit plans audits; and
          consultation concerning financial accounting and reporting standards.

     (3)  Tax fees relate to services performed by the tax division for tax
          compliance, planning, and advice.


                                       72
<PAGE>

PRE-APPROVAL POLICIES AND PROCEDURES

     Our audit committee has adopted a policy and procedures for the
pre-approval of audit and non-audit services rendered by our independent public
accountants, Kost, Forer, Gabbay & Kasierer. Pre-approval of an audit or
non-audit service may be given as a general pre-approval, as part of the audit
committee's approval of the scope of the engagement of our independent auditor,
or on an individual basis. Any proposed services exceeding general pre-approved
levels also requires specific pre-approval by our audit committee. The policy
prohibits retention of the independent public accountants to perform the
prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act
or the rules of the SEC, and also requires the audit committee to consider
whether proposed services are compatible with the independence of the public
accountants.

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

                                 Not applicable.

ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND
PURCHASERS

ISSUER PURCHASE OF EQUITY SECURITIES

     There were no shares purchased by us or on our behalf or by any affiliated
purchaser during 2004.

                                    PART III

ITEM 17. FINANCIAL STATEMENTS

                                 Not applicable.

ITEM 18. FINANCIAL STATEMENTS

                    See pages F-1 - F-41 incorporated herein.


                                       73
<PAGE>


                       LANOPTICS 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 OPERATIONS                           F-5

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)      F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS                        F-7 - F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   F-9 - F-41

                                   ----------

                                       F-1
<Page>

[ERNST & YOUNG LOGO]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             TO THE SHAREHOLDERS OF

                                 LANOPTICS LTD.

     We have audited the accompanying consolidated balance sheets of LanOptics
Ltd. ("the Company") and its subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of operations, changes in shareholders'
deficiency and cash flows for each of the three years in the period ended
December 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. An
audit includes 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, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

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

Tel-Aviv, Israel                                 KOST FORER GABBAY & KASIERER
February 17, 2005                              A Member of Ernst & Young Global

                                       F-2
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                             -------------------
                                                      NOTE     2004       2003
                                                      ----   --------   --------
<S>                                                    <C>   <C>        <C>
ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                 $ 13,504   $ 14,148
   Marketable securities                               4       12,115      5,414
   Trade receivables, net of allowance for doubtful
      accounts of $47 and $0 in 2004 and 2003,
      respectively                                                781        438

   Other accounts receivable and prepaid expenses      5          703        353
   Inventories                                         6        1,279        404
                                                             --------   --------
TOTAL current assets                                           28,382     20,757
                                                             --------   --------
LONG-TERM INVESTMENTS:
   Prepaid development and production costs, net       7          476        522
   Severance pay fund                                           1,489      1,249
                                                             --------   --------
TOTAL long-term investments                                     1,965      1,771
                                                             --------   --------
PROPERTY AND EQUIPMENT, NET                            8          384        564
                                                             --------   --------
INTANGIBLE ASSETS                                      9          634        873
                                                             --------   --------
TOTAL assets                                                 $ 31,365   $ 23,965
                                                             ========   ========
</Table>

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

                                       F-3
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

<Table>
<Caption>
                                                                       DECEMBER 31,
                                                                  ---------------------
                                                           NOTE      2004        2003
                                                           ----   ---------   ---------
<S>                                                         <C>   <C>         <C>
LIABILITIES AND SHAREHOLDERS' DEFICIENCY

CURRENT LIABILITIES:
   Trade payables                                                 $     856   $     202
   Other accounts payable and accrued expenses              10        2,478       2,565
                                                                  ---------   ---------

TOTAL current liabilities                                             3,334       2,767
                                                                  ---------   ---------
LONG-TERM LIABILITIES:
   Accrued severance pay                                              1,985       1,536
   Long-term loan                                           11           --       1,383
                                                                  ---------   ---------

TOTAL long-term liabilities                                           1,985       2,919
                                                                  ---------   ---------

REDEEMABLE PREFERRED SHARES AND
   WARRANT ISSUED BY A SUBSIDIARY                            3       14,946      11,608
                                                                  ---------   ---------

PREFERRED SHARES IN A SUBSIDIARY                                     20,991      20,991
                                                                  ---------   ---------

SHAREHOLDERS' DEFICIENCY:
   Share capital
      Ordinary shares of NIS 0.02 par value -               13
      Authorized: 30,000,000 shares at December 31, 2004
      and 2003; Issued and outstanding: 10,626,285 and
      9,250,535 shares at December 31, 2004 and 2003,
      respectively                                                       70          64
   Additional paid-in capital                                        53,193      39,516
   Accumulated other comprehensive income (loss)                        (84)         16
   Accumulated deficit                                              (63,070)    (53,916)
                                                                  ---------   ---------

TOTAL shareholders' deficiency                                       (9,891)    (14,320)
                                                                  ---------   ---------

TOTAL liabilities and shareholders' deficiency                    $  31,365   $  23,965
                                                                  =========   =========
</Table>

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

                                       F-4
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

<Table>
<Caption>
                                                                  YEAR ENDED DECEMBER 31,
                                                          ---------------------------------------
                                                   NOTE       2004          2003          2002
                                                   ----   -----------   -----------   -----------
<S>                                                 <C>   <C>           <C>           <C>
Revenues                                            15    $     4,746   $     1,756   $       465
Costs of revenues                                               1,889           624           163
Amortization of developed technology                              241           239            90
                                                          -----------   -----------   -----------

Gross profit                                                    2,616           893           212
                                                          -----------   -----------   -----------
Operating expenses:
   Research and development, net                                7,267         7,219         8,075
   In-process research and development write-off                   --            --         3,928
   Selling and marketing, net                                   2,309         2,191         1,913
   General and administrative                                   1,456         1,469         1,288
                                                          -----------   -----------   -----------

Total operating expenses                                       11,032        10,879        15,204
                                                          -----------   -----------   -----------

Operating loss                                                 (8,416)       (9,986)      (14,992)
Financial and other income (expenses), net *)       16           (738)         (418)          638

Loss from continuing operations                                (9,154)      (10,404)      (14,354)
                                                          -----------   -----------   -----------
Discontinued operations:
   Income from discontinued operations of a
      segment of a business                                        --            --            51
                                                          -----------   -----------   -----------

Net loss                                                  $    (9,154)  $   (10,404)  $   (14,303)
                                                          ===========   ===========   ===========

Net loss per share from continuing operations             $     (0.98)  $     (1.23)  $     (1.85)
                                                          ===========   ===========   ===========

Net loss per share                                        $     (0.98)  $     (1.23)  $     (1.85)
                                                          ===========   ===========   ===========
Weighted average number of ordinary shares used
   in computing net loss per share                          9,365,181     8,484,120     7,744,593
                                                          ===========   ===========   ===========
</Table>

*) Reclassified

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

                                       F-5
<Page>

                                              LANOPTICS LTD.AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

<Table>
<Caption>
                                                                                                ACCUMULATED
                                                   NUMBER OF SHARES                                OTHER
                                                ---------------------             ADDITIONAL   COMPREHENSIVE
                                                 ORDINARY    DEFERRED    SHARE      PAID-IN        INCOME
                                                  SHARES      SHARES    CAPITAL     CAPITAL        (LOSS)
                                                ----------   --------   -------   ----------   -------------
<S>                                             <C>           <C>         <C>      <C>             <C>
Balance as of January 1, 2002                    7,290,777     1,000      $ 56     $ 24,792        $   --

Issuance of shares, net                          1,153,508        --         4        8,898            --
Exercise of options                                 21,250        --     *) --           53            --
Retirement of deferred shares                           --    (1,000)       --           --            --
Comprehensive loss:
   Other comprehensive gain - unrealized gain
      on available-for-sale securities                                                                 21
   Net loss                                             --        --        --           --            --
                                                ----------    -------     ----     --------        ------

Total comprehensive loss

Balance as of December 31, 2002                  8,465,535        --        60       33,743            21

Issuance of shares, net                            750,000        --         4        5,637            --
Exercise of options                                 35,000        --     *) --           93            --
Compensation related to options granted to
   employees                                            --        --        --           43            --
Comprehensive loss:
   Other comprehensive loss - unrealized
      losses on available-for-sale securities           --        --        --           --            (5)
   Net loss                                             --        --        --           --            --
                                                ----------    -------     ----     --------        ------

Total comprehensive loss

Balance as of December 31, 2003                  9,250,535        --        64       39,516            16

Issuance of shares, net                          1,368,000        --         6       13,465            --
Exercise of options                                  7,750        --     *) --           40            --
Compensation related to options granted to
   employees                                            --        --        --          172            --
Comprehensive loss:
   Other comprehensive loss - unrealized
      losses on available-for-sale securities           --        --        --           --          (100)
   Net loss                                             --        --        --           --
                                                ----------    -------     ----     --------        ------

Total comprehensive loss

Balance as of December 31, 2004                 10,626,285        --      $ 70     $ 53,193        $  (84)
                                                ==========    =======     ====     ========        ======

<Caption>
                                                                                  TOTAL
                                                                  TOTAL       SHAREHOLDERS'
                                                ACCUMULATED   COMPREHENSIVE       EQUITY
                                                  DEFICIT          LOSS       (DEFICIENCY)
                                                -----------   -------------   -------------
<S>                                              <C>            <C>             <C>
Balance as of January 1, 2002                    $ (29,209)                     $  (4,361)

Issuance of shares, net                                 --                          8,902
Exercise of options                                     --                             53
Retirement of deferred shares                           --                             --
Comprehensive loss:
   Other comprehensive gain - unrealized gain
      on available-for-sale securities                          $      21              21
   Net loss                                        (14,303)       (14,303)        (14,303)
                                                 ---------      ---------       ---------

Total comprehensive loss                                          (14,282)
                                                                =========
Balance as of December 31, 2002                    (43,512)                        (9,688)

Issuance of shares, net                                 --                          5,641
Exercise of options                                     --                             93
Compensation related to options granted to
   employees                                            --                             43
Comprehensive loss:
   Other comprehensive loss - unrealized
      losses on available-for-sale securities           --             (5)             (5)
   Net loss                                        (10,404)       (10,404)        (10,404)
                                                 ---------      ---------       ---------

Total comprehensive loss                                          (10,409)
                                                                =========
Balance as of December 31, 2003                    (53,916)                       (14,320)

Issuance of shares, net                                 --                         13,471
Exercise of options                                     --                             40
Compensation related to options granted to
   employees                                            --                            172
Comprehensive loss:                                     --
   Other comprehensive loss - unrealized
      losses on available-for-sale securities           --           (100)           (100)
   Net loss                                         (9,154)        (9,154)         (9,154)
                                                 ---------      ---------       ---------

Total comprehensive loss                                        $  (9,254)
                                                                =========
Balance as of December 31, 2004                  $ (63,070)                     $  (9,891)
                                                 =========                      =========
</Table>

*) Represents an amount lower than $1

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

                                       F-6
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

<Table>
<Caption>
                                                                  YEAR ENDED DECEMBER 31,
                                                             ---------------------------------
                                                                2004        2003        2002
                                                             ---------   ---------   ---------
<S>                                                          <C>         <C>         <C>
Cash flows from operating activities:
Net loss                                                     $  (9,154)  $ (10,404)  $ (14,303)
   Adjustments to reconcile net loss to net cash used in
      operating activities:
      Income from discontinued operations                           --          --         (51)
      Depreciation and amortization                                661         918       1,255
      Write-off of in-process research and development              --          --       3,928
      Interest and amortization of premium of marketable
         securities                                                275        (126)       (566)
      Loss from sale of marketable debt securities                   5          --          --
      Accrued interest on Redeemable Preferred shares in a
         subsidiary                                                804         504          --
      Capital loss (gain) from sale of property and
         equipment                                                  (1)          3          --
      Accrued severance pay, net                                   209          30         (47)
      Amortization of discount on long-term loan                    88          59          --
      Stock-based compensation related to options granted
         to employees                                              172          43          --
      Increase in trade receivables                               (343)        (76)       (362)
      Decrease (increase) in other accounts receivable and
         prepaid expenses                                         (350)        179        (236)
      Increase in inventory                                       (875)        (27)       (377)
      Increase (decrease) in trade payables                        654        (304)        184
      Increase (decrease) in other accounts payable and
         accrued expenses                                          (87)         55         632
                                                             ---------   ---------   ---------

Net cash used in operating activities                           (7,942)     (9,146)     (9,943)
                                                             ---------   ---------   ---------

Cash flows from investing activities:
   Investment in marketable securities                         (10,820)     (6,493)     (3,142)
   Proceeds from marketable securities                           3,739       7,844      14,758
   Purchase of property and equipment                             (206)       (265)       (435)
   Proceeds from sale of property and equipment                     11          10          --
                                                             ---------   ---------   ---------

Net cash provided by investing activities                       (7,276)      1,096      11,181
                                                             ---------   ---------   ---------
</Table>

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

                                       F-7
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                         ------------------------------
                                                           2004       2003       2002
                                                         --------   --------   --------
<S>                                                      <C>        <C>        <C>
Cash flows from financing activities:
   Issuance of shares, net                                 13,471      5,641         --
   Issuance of Redeemable Preferred shares in a
      subsidiary, net                                       2,563     10,928         --
   Proceeds from exercise of options                           40         93         53
   Issuance expenses                                           --         --        (53)
   Proceeds from long-term loan                                --      1,324         --
   Repayment of long-term loan                             (1,500)        --         --
   Proceeds from issuance of warrants by a subsidiary          --        176         --
                                                         --------   --------   --------

Net cash provided by financing activities                  14,574     18,162         --
                                                         --------   --------   --------

Increase (decrease) in cash and cash equivalents             (644)    10,112      1,238
Cash and cash equivalents at the beginning of the year     14,148      4,036      2,798
                                                         --------   --------   --------

Cash and cash equivalents at the end of the year         $ 13,504   $ 14,148   $  4,036
                                                         ========   ========   ========

Non-cash activities:
   Investment in a subsidiary in consideration of the
      issuance of shares (Note 3):
      Property and equipment                             $     --   $     --   $    204
      Prepaid development and production costs                 --         --        160
      Technology                                               --         --     (1,203)
      Preferred shares in a subsidiary                         --         --     (4,188)
      In-process research and development                      --         --     (3,928)
                                                         --------   --------   --------

      Issuance of shares                                 $     --   $     --   $ (8,955)
                                                         ========   ========   ========

Supplemental disclosure of cash flows activities:
   Cash paid during the period for:
      Interest                                           $     56   $     54   $     --
                                                         ========   ========   ========
</Table>

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

                                       F-8
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

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

NOTE 1:-  GENERAL

          a.   LanOptics Ltd. (the "Company" or "LanOptics") was incorporated in
               1989 as a limited liability company under the laws of the State
               of Israel. Until 1999, the Company's principal business was the
               development, manufacturing and marketing of solutions and
               Internet applications that improved the performance of LANs and
               WANs. In addition, LanOptics operated two independent business
               units, its NetGuard subsidiary, whose operations ceased in early
               2001 and its NetXchange subsidiary whose operations ceased in
               1998. LanOptics is now operating in the segment of network
               processors, through its majority-owned subsidiary, EZchip
               Technologies Ltd., ("EZchip"), which is engaged in the
               development of high performance network processors (see Note 15d
               for information related to major customers).

               EZchip was established in December 1999 as a wholly-owned
               subsidiary of the Company. EZchip's technology provides packet
               processing, classification and traffic management on a single
               chip at wire speed. EZchip's single-chip solutions are used for
               building networking equipment with extensive savings in chip
               count, power and cost. Highly flexible processing enables a wide
               range of applications for the metro, carrier-edge and
               core-enterprise. During 2001 EZchip established a wholly-owned
               subsidiary, EZchip Inc., in the United States, which is engaged
               in the marketing of EZchip's products in North America. As of
               December 31, 2004, the Company holds 53.4% of EZchip's shares and
               of the voting rights of such company. As for additional
               percentage of ownership and control in subsidiaries (see also
               Notes 3 and 13).

          b.   As for additional percentage of ownership and control in
               subsidiaries, see Note 18.

          c.   The Company's Ordinary shares are traded on the NASDAQ SmallCap
               Market under the symbol "LNOP" and on the Tel-Aviv Stock
               Exchange. Prior to April 14, 2003, the Company's Ordinary shares
               were traded on the NASDAQ National Market.

          d.   On December 31, 2002, following two quarters of minimal
               operations relating to its networking solutions products ("legacy
               products"), and based on its expectation of minimal future sales
               of these products, LanOptics management decided to terminate this
               operation and to account for its legacy operations as a
               discontinuation of a business in accordance with Statement of
               Financial Accounting Standard ("SFAS") No. 144, "Accounting for
               the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144")
               in the financial statements as of December 31, 2002. Accordingly,
               the results of operations of the legacy operations have been
               reported separately as discontinued operations in the statements
               of operations.

               For the years ended December 31, 2004, 2003 and 2002 the revenues
               from the legacy operations amounted to $0, $0 and $51,
               respectively.

                                       F-9
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 1:-  GENERAL (CONT.)

          e.   EZchip currently depends on a single manufacturer for production
               of its currently available network processors. If this
               manufacturer should be unable or unwilling to continue to
               manufacture EZchip's products in required volumes or on a timely
               basis, any resulting manufacturing delays could result in the
               loss of sales, which could adversely affect operating results.

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES

          The consolidated financial statements were prepared in accordance with
          U.S. GAAP, as follows:

          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 may differ from those estimates.

          b.   Financial statements in U.S. dollars:

               The currency of the primary economic environment in which the
               operations of the Company and its subsidiaries are conducted is
               the U.S. dollar ("dollar"). Most of the revenues were and are
               denominated and earned in dollars, most purchases of materials
               and components are made in dollars, Financing and investing
               activities, including equity transactions and cash investments,
               are made in U.S. dollars and most of the Company's assets are
               denominated in dollars. Thus, the functional and reporting
               currency of the Company and its subsidiary is the U.S. dollar.

               Accordingly, monetary accounts maintained in currencies other
               than the dollar are remeasured into U.S. dollars in accordance
               with Statement of Financial Accounting Standard Board No. 52,
               "Foreign Currency Translation" ("SFAS No. 52"). All transaction
               gains and losses of the remeasured monetary balance sheet items
               are reflected in the statement of operations as financial income
               or expenses, as appropriate.

          c.   Basis of consolidation:

               The consolidated financial statements include the accounts of the
               Company and its subsidiaries (all of which are inactive as of
               December 31, 2004 except for EZchip Ltd and EZchip Inc.)
               Intercompany balances and transactions have been eliminated upon
               consolidation.

                                      F-10
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          d.   Cash equivalents:

               The Company considers all highly liquid investments that are
               readily convertible to cash and with maturities of three months
               or less at their acquisition date as cash equivalents.

          e.   Marketable securities:

               The Company accounts for its investments in marketable securities
               using SFAS No. 115, "Accounting for Certain Investments in Debt
               and Equity Securities". Management determines the classification
               of marketable securities at the time of purchase and reevaluates
               such designations as of each balance sheet date. As of December
               31, 2004 and 2003, all marketable securities were designated as
               available-for-sale. Available-for-sale securities are carried at
               fair value, with the unrealized gains and losses, reported as a
               separate component of shareholders' equity, accumulated other
               comprehensive income (loss). Realized gains and losses on sales
               of investments, as determined on a specific identification basis,
               are included in the consolidated statements of operations.

          f.   Inventories:

               Inventories are stated at the lower of cost or market value.
               Inventory write-offs are provided for slow-moving items or
               technological obsolescence and are recorded in the consolidated
               statement of operation. Cost is determined as follows:

               Raw materials - using the weighted average method.

               Work in progress and finished products - using the weighted
               average method and calculated manufacturing costs.

          g.   Property and equipment:

               Property and equipment are stated at cost, less accumulated
               depreciation. Depreciation is calculated by the straight-line
               method over the estimated useful lives of the assets.

               The annual depreciation rates are as follows:

<Table>
<Caption>
                                                                ANNUAL DEPRECIATION RATE (%)
                                                              --------------------------------
<S>                                                                        <C>
               Office furniture and equipment                                 6
               Computers, software and electronic equipment                  33
               Motor vehicles                                                15
               Leasehold improvements                         Over the shorter of their useful
                                                                 life or term of the lease
</Table>

                                      F-11
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          h.   Impairment of long-lived assets:

               The Company's long-lived assets and certain identifiable
               intangibles 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 assets.
               If such assets are considered to be impaired, the impairment to
               be recognized is measured by the amount by which the carrying
               amount of the assets exceeds the fair value of the assets. Assets
               to be disposed of are reported at the lower of the carrying
               amount or fair value less costs to sell.

               During the years 2004, 2003 and 2002, no impairment losses have
               been identified.

          i.   Intangible assets:

               Intangible assets are amortized over their useful life using a
               method of amortization that reflects the pattern in which the
               economic benefits from the intangible assets are consumed or
               otherwise used up, in accordance with SFAS No. 142 "Goodwill and
               Other Intangible Assets", ("SFAS No. 142"). Acquired technology
               is amortized on a straight line basis over a period of 5 years.

          j.   Redeemable Preferred shares in a subsidiary and Preferred shares
               in a subsidiary:

               The investment by third parties in Redeemable Preferred shares in
               EZchip and Preferred shares in EZchip is presented as a separate
               component in the balance sheet, Redeemable Preferred shares in a
               subsidiary and Preferred shares in a subsidiary, respectively.

               The Redeemable Preferred shares bear annual interest at the rate
               of 6%. Such interest is accrued and will be paid only upon
               redemption of such shares.

                                      F-12
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          k.   Research and development costs:

               Research and development costs, are charged to the Statement of
               Operations as incurred. SFAS No. 86 "Accounting for the Costs of
               Computer Software to be Sold, Leased or Otherwise Marketed"("SFAS
               No. 86") requires capitalization of certain software development
               costs subsequent to the establishment of technological
               feasibility.

               Based on the Company and its subsidiaries' product development
               process, technological feasibility is established upon completion
               of a working model. Costs incurred by the Company and its
               subsidiaries' between completion of the working models and the
               point at which the products are ready for general release have
               been insignificant. Therefore, all research and development costs
               have been expensed as incurred.

          l.   Severance pay:

               The liability of the Company and its Israeli subsidiaries for
               severance pay is calculated pursuant to Israel's Severance Pay
               Law based on the most recent salary of the employees multiplied
               by the number of years of employment, as of the balance sheet
               date and is presented on an undiscounted basis. Employees are
               entitled to one month's salary for each year of employment or a
               portion thereof. The liability for all of the employees is fully
               provided by monthly deposits with insurance policies and by an
               accrual. The value of these policies is recorded as an asset in
               the Company's balance sheet.

               The deposited funds may be withdrawn only upon the fulfillment of
               the obligation, pursuant to the 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 (income) for the years ended December 31,
               2004, 2003 and 2002 were $193, $18 and $(25), respectively.

          m.   Income taxes:

               The Company and its subsidiaries account for income taxes in
               accordance with SFAS No.109, "Accounting for Income Taxes" ("SFAS
               No.109"). 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 Company and its
               subsidiaries provide a valuation allowance, if necessary, to
               reduce deferred tax assets to their estimated realizable value.

                                      F-13
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          n.   Net loss per share:

               Basic net loss per share is computed based on the weighted
               average number of ordinary shares outstanding during each year.
               Diluted net loss per share is computed based on the weighted
               average number of Ordinary shares outstanding during each year,
               plus dilutive potential Ordinary shares considered outstanding
               during the year, in accordance with SFAS No. 128 "Earnings Per
               share"("SFAS No. 128").

               For the years ended December 31, 2004, 2003 and 2002, all
               outstanding stock options and warrants have been excluded from
               the calculation of the diluted net loss per Ordinary share
               because all such stock options and warrants were antidilutive.
               The total weighted average number of Ordinary shares related to
               options and warrants excluded from the calculation of diluted net
               loss per share were 306,239, 313,989 and 258,739 for the years
               ended December 31, 2004, 2003 and 2002, respectively.

          o.   Accounting for stock based compensation:

               The Company has elected to follow Accounting Principles Board
               Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
               25") and FASB Interpretation No. 44 "Accounting for Certain
               Transactions Involving Stock Compensation" ("FIN 44") in
               accounting for its employee stock option plans. Under APB 25,
               when the exercise price of the Company's stock options is less
               than the market price of the underlying shares on the date of
               grant, compensation expense is recognized over the vesting
               period.

               Under SFAS No. 123 (as amended by SFAS No. 148, "Accounting for
               Stock-Based Compensation - transition and disclosure" ("SFAS No.
               148")), pro forma information regarding net income (loss) and net
               earnings (loss) per share is required, and has been determined as
               if the Company had accounted for its employee stock options under
               the fair value method of that Statement. The fair value for these
               options was estimated at the date of grant using the
               Black-Scholes valuation model with the following assumptions for
               2003: risk-free interest rates of 1.98%; dividend yields of 0%;
               expected life for an option of up to two years and excepted
               volatility of 8.36%. No options were granted during 2002 and
               2004.

               The fair value for the subsidiary's options was estimated at the
               date of grant using the Black-Scholes valuation model, with the
               following assumptions for 2004, 2003 and 2002: risk free interest
               rates of 3.08%, 2.98% and 4.0%; divided yields of 0%, expected
               life for options of four years and excepted volatility of 0.5%.

               For purposes of pro-forma disclosure, the estimated fair value of
               the options is amortized to expenses over the options' vesting
               period.

                                      F-14
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               Pro forma information under SFAS 123:

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                     ---------------------------------
                                                        2004        2003        2002
                                                     ---------   ---------   ---------
<S>                                                  <C>         <C>         <C>
               Loss from continuing operations as
                  reported                           $  (9,154)  $ (10,404)  $ (14,354)
                                                     =========   =========   =========

               Income from discontinued operations
                  as reported                        $      --   $      --   $      51
                                                     =========   =========   =========

               Net loss as reported                  $  (9,154)  $ (10,404)  $ (14,303)
               Add: stock-based employee
                  compensation expense determined
                  under fair value based method         (1,219)       (387)       (204)
               Deduct: stock-based employee
                  compensation expense included in
                  reported net loss                        172          43          --
                                                     ---------   ---------   ---------

               Pro forma loss from continuing
                  operations                         $ (10,201)  $ (10,748)  $ (14,558)
                                                     =========   =========   =========

               Pro forma income from discontinued
                  operations                         $      --   $      --   $      51
                                                     =========   =========   =========

               Pro forma net loss                    $ (10,201)  $ (10,748)  $ (14,507)
                                                     =========   =========   =========

               Pro forma net loss per share from
                  continuing operations              $   (1.09)  $   (1.27)  $   (1.87)
                                                     =========   =========   =========

               Pro forma net loss per share          $   (1.09)  $   (1.27)  $   (1.87)
                                                     =========   =========   =========
</Table>

               The Company applies SFAS No. 123 "Accounting for Stock-Based
               Compensation" ("SFAS 123") and EITF 96-18 "Accounting for Equity
               Instruments that are Issued to Other than Employees for
               Acquiring, or in Conjunction with Selling, Goods or Services"
               with respect to options issued to non-employees. SFAS No.123
               requires use of an option valuation model to measure the fair
               value of the options on the date of grant.

                                      F-15
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          p.   Revenue recognition:

               The Company generates most of its revenues from sales of network
               processors chips and to a lesser extent from the sales of
               network-processor based systems, software tools and evaluation
               boards, through EZchip Ltd. and its wholly owned subsidiary
               EZchip Inc.

               Revenues from sales of evaluation boards and development software
               tools, required in the design period are recognized over the
               customers design period - usually 12 to18 months, which is the
               expected average time required for EZchip's customers to develop
               networking products, based on EZchip technology.

               Revenues from sales of network processors chips and production
               stage network processor based systems are recognized in
               accordance with Staff Accounting Bulletin No. 104 "Revenue
               Recognition in Financial Statements" ("SAB 104"), when persuasive
               evidence of an agreement exists, delivery of the product has
               occurred, the fee is fixed or determinable and collectibility is
               probable. Generally, the Company does not have any significant
               obligations after delivery. The Company does not grant a right of
               return to its customers.

               Arrangements that involve the delivery or performance of multiple
               products, services and/or rights to use assets are recognized in
               accordance with Emerging Issues Task Force ("EITF") Issue No.
               00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
               00-21").

               A multiple-element arrangement is separated into more than one
               unit of accounting if the functionality of the delivered
               element(s) is not dependent on the undelivered element(s), there
               is vendor-specific objective evidence (VSOE) of fair value of the
               undelivered element(s) and delivery of the delivered element(s)
               represents the culmination of the earnings process for those
               element(s).

               If these criteria are not met, the revenue is deferred until such
               criteria are met or until the period in which the last
               undelivered element is delivered. If there is VSOE for all units
               of accounting in an arrangement, the arrangement consideration is
               allocated to the separate units of accounting based on each
               unit's relative VSOE.

               Deferred revenues include amounts received from customers for
               which revenue has not been recognized.

                                      F-16
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          q.   Advertising expenses:

               Advertising expenses are charged to the statement of operations,
               as incurred. Advertising expenses for the years ended December
               31, 2004, 2003 and 2002 amounted to $142, $169 and $121,
               respectively.

          r.   Concentrations of credit risk:

               Financial instruments that potentially subject the Company and
               its subsidiaries to concentrations of credit risk consist
               principally of cash and cash equivalents, marketable securities
               and trade receivables.

               The Company's cash and cash equivalents are mainly invested in
               major banks in Israel and the United States. Such deposits in
               U.S. banks may be in excess of insured limits and are not insured
               in other jurisdictions. Management believes that the financial
               institutions that hold the Company's investments are financially
               sound, and accordingly, minimal credit risk exists with respect
               to these investments.

               The trade receivables of the Company are derived from sales to
               customers located mainly in North America, the Far East and
               Israel. The Company performs ongoing credit evaluations of its
               customers, and to date has not experienced any material losses.
               An allowance for doubtful accounts is determined with respect to
               those amounts that the Company has determined to be doubtful of
               collection.

               The Company's marketable securities include investments in U.S.
               corporations and government debt securities. Management believes
               that those corporations are financially sound, the portfolio is
               well diversified, and accordingly, minimal credit risk exists
               with respect to these marketable securities.

               The Company and its subsidiaries have no off-balance-sheet
               concentrations of credit risk such as foreign exchange contracts,
               option contracts or other foreign hedging arrangements.

          s.   Fair value of financial instruments:

               The following methods and assumptions were used by the Company
               and its subsidiaries in estimating their fair value disclosures
               for financial instruments:

               The carrying amounts of cash and cash equivalents, trade
               receivables, other accounts receivable, trade payables and other
               accounts payable approximate their fair value due to the
               short-term maturity of such instruments.

               The fair value of marketable securities is based on quoted market
               prices. As for the fair value of the marketable securities see
               Note 4.

                                      F-17
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          t.   Reclassification:

               Certain prior year amounts have been reclassified to conform to
               the current year presentation.

          u.   Impact of recently issued accounting standards:

               In December 2004, the FASB issued SFAS No. 153, Exchanges of
               Non-monetary Assets, an Amendment of APB Opinion No. 29 ("SFAS
               153"). The guidance in APB Opinion No. 29, Accounting for
               Non-monetary Transactions ("APB 29"), is based on the principle
               that exchanges of non-monetary assets should be measure based on
               fair value of the assets exchanged. APB 29 included certain
               exceptions to that principle. SFAS 153 amends APB 29 to eliminate
               the exception for non-monetary exchanges of similar productive
               assets and replaces it with a general exception for exchanges of
               non-monetary assets that do not have commercial substance. A
               non-monetary exchange has commercial substance if the future cash
               flows of the entity are expected to change significantly as a
               result of the exchange. SFAS 153 is effective for non-monetary
               assets exchanges occurring in fiscal periods beginning after June
               15, 2005. The Company does not expect that the adoption of SFAS
               153 will have a material effect on its financial position or
               results of operations.

               On December16, 2004, the FASB issued SFAS No. 123R (revised
               2004), Share Based Payment, which is revision of FASB Statement
               No. 123, Accounting for Stock Based Compensation. SFAS 123R
               supersedes APB No. 25, and amends SFAS No. 95, Statement of Cash
               Flow. Generally, the approach in SFAS 123R is similar to the
               approach described in Statement 123. However, SFAS 123R requires
               all share-based payments to employees, including grants of
               employee stock options, to be recognized in the income statement
               based on their fair value. Pro forma disclosure is no longer an
               alternative.

               For public companies, SFAS 123R must be adopted no later than
               July 1, 2005. Early adoption is permitted in periods in which
               financial statements have not yet been issued. The Company will
               adopt SFAS 123R on July 1, 2005.

               SFAS 123R permits companies to adopt its requirement using one of
               the two methods:

               1.   A "modified prospective" method in which compensation cost
                    is recognized beginning with the effective date (a) based on
                    the requirements of SFAS 123R for all share-based payments
                    granted after the effective date and (b) based on the
                    requirements of SFAS 123R for all awards granted to
                    employees prior to the effective date of SFAS 123R that
                    remain unvested in the effective date.

                                      F-18
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               2.   A "modified retrospective" method which includes the
                    requirements of the modified prospective method described
                    above, but also permits entities to restate based in the
                    amounts previously recognized under SFAS 123R for purposes
                    of pro forma disclosures either: (a) all prior periods
                    presented or (b) prior interim period of the year of
                    adoption.

               The Company and its subsidiaries plan to adopt SFAS 123R using
               the modified prospective method. As permitted by SFAS 123, the
               Company and its subsidiaries currently account for share based
               payments to employees using APB 25 intrinsic value method and, as
               such, generally recognize no compensation cost for employee stock
               options. Accordingly, the adoption of SFAS 123R fair value method
               will have significant impact in the Company and its subsidiaries'
               result of operations, although it will have no impact on the
               Company's overall financial position. The impact of adoption of
               SFAS 123R cannot be predicted at this time because it will depend
               on levels of share based payments granted in the future. However,
               had the Company and its subsidiaries' adopted SFAS 123R in prior
               periods, the impact of that standard would have approximated the
               impact of SFAS 123 as described in the disclosure of pro forma
               net income and earnings per share in Note 2 the Company's
               consolidated financial statements.

               In March 2004, the FASB approved the consensus reached on
               Emerging Issues Task Force (EITF) Issue No. 03-1, "The Meaning of
               Other-Than-Temporary Impairment and Its Application to Certain
               Investments" ("EITF 03-1"). The objective of this Issue is to
               provide guidance for identifying impaired investments. EITF 03-1
               also provides new disclosure requirements for investments that
               are deemed to be temporarily impaired. The accounting provisions
               of EITF 03-1 are effective for all reporting periods beginning
               after June 15, 2004, while the disclosure requirements are
               effective only for annual periods ending after June 15, 2004. The
               Company has evaluated the impact of the adoption of EITF 03-1 and
               does not believe the impact will be significant to the Company's
               overall results of operations or financial position.

                                      F-19
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 3:-  INVESTMENT IN EZCHIP

          a.   On August 19, 2002, the Company acquired 2,777,778 Preferred A
               shares and 737,462 Preferred B shares of EZchip, in consideration
               of the issuance of 1,153,508 Ordinary shares of the Company. The
               total fair value of the Ordinary shares issued for the
               acquisition was $8,955, (determined based on the average price of
               LanOptics' Ordinary shares two days before and after the
               announcement date of the transaction). The transaction was
               accounted for according to the purchase method of accounting, and
               accordingly, the purchase price was allocated to the assets
               acquired and liabilities assumed based upon their estimated fair
               values at the date of acquisition. Since the fair value of the
               identifiable net assets acquired exceeded the cost, the excess of
               the fair value over cost (i.e., negative goodwill) reduced, on a
               pro rata basis, amounts assigned to all of the acquired assets.

               The purchase price allocation was as follows:

<Table>
<Caption>
                                                              Purchase price
                                                                allocation
                                                              --------------
<S>                                                              <C>
               EZchip Preferred A and B shares acquired          $ 4,188
               Intangible assets acquired:
                  In-process research and development (1)          3,928
                  Developed technology (2)                         1,203
                  Property and equipment                            (204)
               Prepaid development and production costs (3)         (160)
                                                                 -------

               Total consideration                               $ 8,955
                                                                 =======
</Table>

               (1)  Purchased in-process research and development costs were
                    written off in accordance with FASB Interpretation No. 4
                    "Applicability of FASB Statement No. 2 to Business
                    Combinations Accounted for by the Purchase Method an
                    interpretation of FASB Statement No. 2".

               (2)  The developed technology is amortized using the
                    straight-line method over the useful life of the technology,
                    which is five years. (See Note 9.)

               (3)  Prepaid development costs are amortized upon achievement of
                    milestones determined in the agreement. The prepaid
                    production costs are amortized according to the ratio of
                    units produced and the total estimated units to be
                    manufactured under the agreement. (See Note 7.)

                                      F-20
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 3:-  INVESTMENT IN EZCHIP (CONT.)

          b.   During March 2003, EZchip signed an investment agreement (the
               "Investment Agreement") pursuant to which EZchip was expected to
               raise up to $21,500 in return for the issuance of up to
               26,345,092 Redeemable Preferred C shares at a price per share of
               $0.8161. The funding consisted of an initial equity investment of
               $13,500 with an option to invest another $8,000 in equity in the
               future.

               In March 2003, EZchip issued to LanOptics and to third parties
               16,542,267 Series C Redeemable Preferred shares in consideration
               of $13,500 ("First investment"). The net amount of $10,928, which
               was invested by third parties, was recorded as Redeemable
               Preferred shares in a subsidiary.

               In March 2004, in the framework of the March 2003 Investment
               Agreement EZchip issued 9,802,825 Series C Redeemable Preferred
               Shares to the Company and to third parties (the "Second
               Investment"). Out of the total consideration of $8,000 that was
               invested in EZchip in March 2004, third parties invested a net
               amount of $2,563. The holders of the Series C Redeemable
               Preferred Shares may request redemption of the shares after four
               years. The shares will be redeemed at a price per share equal to
               the greater of (a) the original Series C per share issue price
               plus an amount equal to any accrued and unpaid dividends thereon
               plus 6% coupon interest compounded annually or (b) the fair
               market value of such shares. Since the shareholders may request
               redemption after four years, the net amount that was invested by
               third parties was recorded as Redeemable Preferred shares in a
               subsidiary as a mezzanine account (between liabilities and
               shareholder's equity).

          c.   In May 2003, LanOptics executed an agreement with all of the
               major shareholders of EZchip (the "Major Shareholders"), pursuant
               to which the Company offered the Major Shareholders the option to
               exchange all their shares in EZchip for Ordinary shares of
               LanOptics, subject to the fulfillment of certain conditions (the
               "Swap Option"). Under the terms of the Swap Option, the exchange
               ratio will be calculated according to a formula determined
               between the parties with no differences among the outstanding
               series of EZchip shares. The Swap Option is exercisable by the
               Major Shareholder until the earlier of the (1) IPO of EZchip 's
               securities or (2) sale of substantially all of EZchip's assets or
               securities.

               As of December 31, 2004, the Company holds 53.4% of EZchip shares
               and of the voting rights in such company.

                                      F-21
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 4:-  MARKETABLE SECURITIES

          As of December 31, 2004 and 2003 all the Company's securities were
          classified as available-for- sale.

<Table>
<Caption>
                                                     2004                               2003
                                      ---------------------------------   --------------------------------
                                      AMORTIZED   UNREALIZED    MARKET    AMORTIZED   UNREALIZED    MARKET
                                         COST       LOSSES       VALUE       COST        GAINS      VALUE
                                      ---------   ----------   --------   ---------   ----------   -------
<S>                                    <C>          <C>        <C>         <C>           <C>       <C>
          Corporate debt securities    $  5,745     $ (39)     $  5,706    $ 3,886       $ 12      $ 3,898
          US government
             institutions                 6,454       (45)        6,409      1,512          4        1,516
                                       --------     -----      --------    -------       ----      -------

          Total                        $ 12,199     $ (84)     $ 12,115    $ 5,398       $ 16      $ 5,414
</Table>

<Table>
<Caption>
                                           2004
                                   --------------------
                                   AMORTIZED    MARKET
                                      COST       VALUE
                                   ---------   --------
<S>                                 <C>        <C>
          Matures in one year       $  6,705   $  6,653
          Matures after one year       5,494      5,462
                                    --------   --------

          Total                     $ 12,199   $ 12,115
                                    ========   ========
</Table>

          The gross realized gains on available-for-sale securities totaled to
          $5, $0 and $0 in 2004, 2003 and 2002, respectively.

          For the years ended December 31, 2004, 2003 and 2002, the unrealized
          gain (losses) amounted to $(100), $(5) and $21, respectively.

          The following table summarizes the fair value and gross unrealized
          losses related to available-for-sale securities, aggregated by
          investment category and length of time to maturities as of December
          31, 2004:

<Table>
<Caption>
                                         LESS THAN 12 MONTHS     12 MONTHS OR MORE            TOTAL
                                        --------------------   --------------------   ---------------------
                                          FAIR    UNREALIZED     FAIR    UNREALIZED     FAIR     UNREALIZED
                                         VALUE      LOSSES      VALUE      LOSSES       VALUE      LOSSES
                                        -------   ----------   -------   ----------   --------   ----------
<S>                                     <C>         <C>        <C>         <C>        <C>          <C>
          Corporate bonds               $ 3,729     $ (37)     $ 1,977     $  (2)     $  5,706     $ (39)
          U.S government institutions     2,924       (15)       3,485       (30)        6,409       (45)

                                        -------     -----      -------     -----      --------     -----

          Total                         $ 6,653     $ (52)     $ 5,462     $ (32)     $ 12,115     $ (84)
                                        =======     =====      =======     =====      ========     =====
</Table>

                                      F-22
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 5:-  OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

<Table>
<Caption>
                                     DECEMBER 31,
                                   ---------------
                                     2004     2003
                                   -------   -----
<S>                                <C>       <C>
          Government authorities   $   149   $  46
          Employees                     19      46
          Prepaid expenses             503     232
          Unbilled receivables          --      25
          Others                        32       4
                                   -------   -----

          Total                    $   703   $ 353
                                   =======   =====
</Table>

NOTE 6:-  INVENTORIES

<Table>
<S>                                <C>       <C>
          Raw materials            $   173   $ 159
          Work in progress             166      24
          Finished products            940     221
                                   -------   -----

          Total                    $ 1,279   $ 404
                                   =======   =====
</Table>

                                      F-23
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 7:-  PREPAID DEVELOPMENT AND PRODUCTION COSTS

          During 2000, the Company recorded prepaid development and production
          costs in the amount of $ 2,134 pursuant to an agreement signed between
          EZchip and IBM. According to the agreement, EZchip issued to IBM fully
          vested non-forfeitable Ordinary shares and is also obligated to make
          future payments according to achievements of milestones and production
          quantities, in consideration of development and production services to
          be provided by IBM, which consists of the following:

          (a) Development - Access to unique semiconductor communications cores
          and technologies, and (b) Production - IBM has committed to develop
          specialized high-performance embedded DRAM cores, which meet the
          requirements of EZchip's 10-Gigabit wire-speed processing. The fair
          value of these services was measured in accordance with EITF 96-18
          "Accounting for Equity Investments That Are Issued to Other Than
          Employees for Acquiring or in Conjunction with Selling, Goods or
          Services" ("EITF 96-18") and recorded as an asset.

          The Ordinary shares that were issued were valued in accordance with
          deemed fair value of EZchip's Ordinary shares at the date of the
          agreement based on a valuation performed by the Company's management.
          In addition, the Company performed a valuation of the development
          services, based on estimations performed by the Company's management
          of the scope of the anticipated efforts involved, using its best
          judgment and experience, as well as its acquaintance with the market
          price for similar development services. As support for the
          management's estimation, the Company also reviewed negotiations for
          comparable transactions, which indicated similar prices for IBM's
          development services. The remainder of the value of the shares issued
          to IBM was allocated to production services. Accordingly, prepaid
          costs totaling $ 2,134 were allocated between prepaid development
          services of $ 1,500, and prepaid production services of $ 634.

          Development costs are amortized upon achievement of milestones
          determined in the agreement.

          Production costs are included in cost of sales based on quantities
          produced. The production costs are amortized according to the ratio of
          units produced and the total estimated units to be manufactured under
          the agreement.

          For the years ended December 31, 2004, 2003 and 2002, amortization
          expenses related to the development costs amounted to $ 0, $ 122 and $
          505, respectively and the amortization expenses related to the
          production costs amounted to $ 47, $ 12 and $ 4, respectively.

                                      F-24
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 8:-  PROPERTY AND EQUIPMENT

<Table>
<Caption>
                                                               DECEMBER 31,
                                                            -----------------
                                                              2004      2003
                                                            -------   -------
<S>                                                         <C>       <C>
          Cost:
             Office furniture and equipment                 $     6   $     5
             Computers, software and electronic equipment     2,981     2,781
             Motor vehicles                                      41        62
             Leasehold improvements                              52        47
                                                            -------   -------

          Total cost                                          3,080     2,895
                                                            -------   -------

          Total accumulated depreciation                      2,696     2,331
                                                            -------   -------

          Depreciated cost                                  $   384   $   564
                                                            =======   =======
</Table>

          Depreciation expenses for the years ended December 31, 2004, 2003 and
          2002, amounted to $ 376, $ 545 and $ 655, respectively.

NOTE 9:-  INTANGIBLE ASSETS

<Table>
<Caption>
                                        DECEMBER 31,
                                     -----------------
                                       2004      2003
                                     -------   -------
<S>                                  <C>       <C>
          Cost:
             Developed technology    $ 1,203   $ 1,203

          Accumulated amortization       569       330
                                     -------   -------

          Amortized cost             $   634   $   873
                                     =======   =======
</Table>

          Amortization expenses for the years ended December 31, 2004, 2003 and
          2002, amounted to $ 238, $ 239 and $ 91, respectively.

NOTE 10:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<Table>
<Caption>
                                              DECEMBER 31,
                                           -----------------
                                             2004      2003
                                           -------   -------
<S>                                        <C>       <C>
          Employees and payroll accruals   $ 1,308   $ 1,199
          Accrued expenses                     915       843
          Deferred revenues                    255       420
          Others                                --       103
                                           -------   -------

                                           $ 2,478   $ 2,565
                                           =======   =======
</Table>

                                      F-25
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 11:- LONG-TERM LOAN

          In April 2003, EZchip signed a Loan Agreement (the "Loan Agreement")
          with a third party (the "Lender") for providing EZchip with a $ 1,500
          (the "Loan"). The Loan bears annual interest of LIBOR + 4.5% per
          annum.

          In addition, EZchip granted the Lender a warrant to purchase 551,409
          Preferred C shares (adjusted in 2004 as described below) at an
          exercise price of $ 0.8161 per share. The Warrant is exercisable until
          the earlier of (i) March 2011 or (ii) an initial public offering
          ("IPO") or a M&A transaction. Moreover, it was agreed that should the
          Loan be repaid prior to October 2004, the number of warrants granted
          to the Lender would be decreased to 459,503.

          According to the Loan Agreement, the Loan was to be automatically
          repaid at any time at the discretion of EZchip at the earlier of (1)
          March 14, 2005; (2) the consummation of an investment in EZchip of at
          least $15,000, or (3) an IPO.

          In August 2004, EZchip repaid the Loan and as such, the floating
          charge, which was placed in respect of this Loan, was removed.

          The warrant was accounted for in accordance with APB 14, "Accounting
          for Convertible Debt and Debt Issued with Stock Purchase Warrants"
          ("APB 14"). Under APB 14, the fair value of the warrants was
          calculated using the Black-Scholes valuation model with the following
          assumptions: a risk-free interest rate of 1.38%, a dividend yield of
          0%, a volatility of 0.5% and a weighted average expected life of eight
          years. The fair value of the warrants, at the amount of $176, was
          presented as "Warrants Issued by a Subsidiary", and accordingly as a
          discount on the loan. The discount is amortized as financial expenses
          over a period of two years, based on the assumption that the Loan will
          be repaid in March 2005.

          In accordance with the terms of the Loan Agreement, the number of
          warrants granted to Lender was decreased to 459,503 due to the
          repayment of the loan prior to October 2004. Consequently, 91,900
          options were forfeited and financial income at the amount of $29 was
          recorded.

          As of December 31, 2004, the value of the Warrants Issued by a
          Subsidiary amounted to $147.

                                      F-26
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES

          a.   Royalty commitments:

               Under the research and development agreements of the Company and
               its subsidiaries with the Office of the Chief Scientist of the
               Ministry of Industry and Trade, the Company and its subsidiaries
               received grants for the funding of research and development
               projects.

               The Company is committed to pay royalties at the rate of 3%-4.5%
               to the Chief Scientist with respect to products in which the
               Chief Scientist participates in their research and development
               costs, up to an amount equal to 100%-150% of the grants received.
               Repayment of such grants is not required in the event that there
               are no sales of products developed through such grants. As of
               December 31, 2004, the Company has a contingent obligation to pay
               royalties with respect to the aforementioned grants in the amount
               of $7,802 (excluding accrued interest), which is related to
               discontinued operations. Therefore, the Company does not
               anticipate that it will pay additional royalties in respect of
               these grants.

               During the years 2004, 2003 and 2002, no royalties have been paid
               or accrued.

          b.   Lease commitments:

               1.   The Company and its subsidiaries lease their facilities
                    under operating lease agreements, which will expire in 2007.
                    The minimum lease payments under non-cancelable operating
                    leases are as follows:

<Table>
<Caption>
                            YEAR ENDED
                           DECEMBER 31,
                           ------------
<S>                            <C>
                    2005       $ 339
                    2006         339
                    2007          28
                               -----

                               $ 706
                               =====
</Table>

                    In case the Company will decide to terminate the operating
                    lease agreements earlier, the Company will pay compensation
                    in an amount of $20 to $40.

                    The Company's subsidiary leases two offices in the U.S.
                    under lease agreements, which it renews every six months for
                    a monthly payment of $7.

                    Total rent expenses of the Company and its subsidiaries, for
                    the years ended December 31, 2004, 2003 and 2002, amounted
                    to $363, $370 and $410, respectively.

                                      F-27
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

               2.   The Company and EZchip lease motor vehicles under operating
                    lease agreements, which will expire in 2007. The minimum
                    lease payments under non-cancelable operating leases are as
                    follows:

<Table>
<Caption>
                            YEAR ENDED
                           DECEMBER 31,
                           ------------
<S>                            <C>
                    2005       $ 372
                    2006         348
                    2007         100
                               -----
                               $ 820
                               =====
</Table>

                    Motor vehicles lease expenses for the years ended December
                    31, 2004, 2003 and 2002, amounted to $572, $443 and $549,
                    respectively.

          c.   According to the investment agreement (see Note 13a(2) ) the
               investors were granted certain registration rights. The
               investment agreement provides for liquidated damages at if a
               registration statement is not declared or maintained effective
               with the U.S. Securities and Exchange Commission (as defined in
               the investment agreement).

                                      F-28
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 13:- SHAREHOLDERS' EQUITY

          a.   Company's shares:

               1.   Ordinary shares confer on their holders the right to receive
                    notice to participate and vote in general meetings of the
                    Company, the right to a share in the excess of assets upon
                    liquidation of the Company, and the right to receive
                    dividends, if declared.

               2.   On November 24, 2004, the Company signed an investment
                    agreement pursuant to which the Company issued 1,368,000
                    Ordinary shares for a net consideration of $ 13,471.
                    Issuance costs related to the investment, amounted to $893.
                    In addition, the investors were granted warrants to purchase
                    478,800 Ordinary shares at an exercise price of $ 15.5 per
                    share with an exercise period of five years. According to
                    the investment agreement, the Company has a commitment to
                    register to trade the shares underlying the agreement. Any
                    delay in registration and/or effectiveness of a registration
                    statement (as defined in the investment agreement) would
                    result in liquidated damages to be paid in cash to the
                    investors. The Company classified the warrants' fair value
                    as permanent equity.

                    On December 23, 2004, the Company filed a Form F-3
                    registration statement with respect to the shares issued
                    under the investment agreement, including the underlying
                    shares related to the warrants. The Form F-3 registration
                    statement was declared effective on February 2, 2005.

                    In December 2003, the Company issued 750,000 Ordinary shares
                    for a net consideration of $ 5,641. In addition, the Company
                    granted the investors warrants to purchase up to 187,500
                    Ordinary shares at an exercise price of $ 11.39 per Ordinary
                    share. The warrants are exercisable until December 2008. On
                    January 23, 2004, the Company filed a Form F-3 registration
                    statement with respect to the 750,000 shares that were
                    issued and the 187,500 shares underlying the warrants. The
                    Form F-3 registration statement was declared effective on
                    February 17, 2004.

                                      F-29
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)

          b.   Subsidiary's shares:

               The rights, preferences and restrictions of the shares of EZchip
               are as follows:

               1.   The Preferred shares confer on their holders all of the
                    rights conferred by the Ordinary shares.

               2.   Voting rights:

                         Every holder of Preferred Shares shall have one vote
                         for each Ordinary share into which the Preferred shares
                         held by him could be converted.


               3.   Conversion:

                         Each Preferred share shall be convertible at the option
                         of the holder into EZchip's Ordinary shares on a 1:1
                         basis, subject to adjustment.

                         The Preferred shares shall automatically be converted
                         into EZchip Ordinary shares on a 1:1 basis, subject to
                         adjustment, upon a qualified IPO or by decision of the
                         holders of a majority of the outstanding Preferred
                         shares at any time.

               4.   Dividend preference:

                         Each holder of Preferred shares shall be entitled to
                         receive, when and if declared, non-cumulative dividends
                         at the rate of 6% per annum from the original purchase
                         date, prior and in preference to any declaration or
                         payment of any dividend to the holders of Ordinary
                         shares.

                         The dividend preference shall be allocated on a
                         pro-rata basis between the holders of Series A
                         Preferred shares, the holders of Series B Preferred
                         shares, and the holders of Series C Preferred shares.

               5.   Anti-dilution:

                         In the event that at any time after the original
                         issuance date of Preferred A, B and C shares, EZchip
                         issues additional shares at a price which reflects a
                         price per share that is lower than the price of the
                         Preferred A or Preferred B or Preferred C shares, then
                         the conversion price for each Preferred share shall be
                         adjusted to reflect such price reduction, in accordance
                         with determined formula for each Series of Preferred
                         shares.

                                      F-30
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)

               6.   Liquidation preference:

                    (a)  First, each Series C Preferred share shall entitle its
                         holder to the original Series C per share issue price
                         (the "C FIRST PREFERENCE"); (b) second, each Series B
                         Preferred share shall entitle its holder to the
                         original Series B per share issue price (the "B FIRST
                         PREFERENCE"); (c) Third, each Series A Preferred share
                         shall entitle its holder to the original Series A per
                         share issue price (the "A FIRST PREFERENCE"); (d)
                         fourth, each Series C Preferred share shall entitle its
                         holder to one and a half times the original Series C
                         per share issue price (the "C SECOND PREFERENCE" and
                         together with the C FIRST PREFERENCE, the "C
                         PREFERENCE"); (e) fifth, each Series B Preferred share
                         shall entitle its holder to one and a half times the
                         Original Series B per share issue price (the "B SECOND
                         PREFERENCE" and together with the B FIRST PREFERENCE,
                         the "B PREFERENCE") and, (f) sixth, in the event that
                         the assets available for distribution shall equal or
                         exceed the amount necessary to pay the full Series C, B
                         and A Preference, then after those distributions, all
                         of the remaining assets shall be distributed to the
                         holders of Series A, B and C Preferred shares and
                         Ordinary shares in proportion to the respective
                         percentage holdings, assuming all of the outstanding
                         Preferred shares have been converted into Ordinary
                         shares (the "DISTRIBUTION").

                         The previous paragraph is subject to the following:
                         Each holders of Series C Preferred and or Series B
                         Preferred Shares shall receive, with respect to each
                         Series C Preferred and or Series B Preferred Shares
                         held by such holder, the greater of (1) the C
                         Preference or B Preference as applicable to such
                         Preferred Shares, or (2) the amount that such holder
                         would receive pursuant to the abovementioned
                         Distribution. The holders of Series A Preferred shares
                         shall not be entitled to receive the A Preference if
                         upon a distribution of the assets of the Company
                         pursuant to the abovementioned Distribution, without
                         giving effect to the A Preference, such holder would
                         receive, in respect of each Series A Preferred share an
                         amount equal to or greater than three times the
                         original A issue price.

                         The aggregate liquidation preference, related to the
                         holders of EZchip's shares, other than LanOptics, as of
                         December 31, 2004 amounted to approximately $ 84,000.

                                      F-31
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)

               7.   Redemption:

                    At the request of the holders of Series C Preferred shares
                    after four years from the issuance date, EZchip will be
                    required to redeem the Series C Preferred shares at a price
                    per share equal to the greater of (a) the original Series C
                    per share issue price plus an amount equal to any accrued
                    and unpaid dividends thereon plus 6% coupon interest
                    compounded annually or (b) the fair market value of such
                    shares. EZchip will be required to redeem Preferred C Shares
                    subject to approval of a majority of Series C Preferred
                    shareholders.

               8.   Required consent:

                    EZchip's articles of incorporation require approval by a
                    simple majority of its board of directors or shareholders
                    actions in the ordinary course of business.

                    The consent of holders of a majority of the Series C
                    Preferred shares shall be required to:

                    o    Change the rights and terms of the Series C Preferred
                         shares;

                    o    Issue any security either senior to or on a parity with
                         the Series C Preferred shares;

                    o    Sell or merge EZchip (or any other corporate
                         reorganization) or sell or exclusively license a
                         substantial portion of its assets;

                    o    Pay any dividend to or redeem any existing Preferred
                         shares or Ordinary shares;

                    o    Change EZchip's by-laws or articles of incorporation.

                                      F-32
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)

          c.   Stock option plans:

               In 1992 the Company adopted the 1992 Stock Option plan (the "1992
               Plan") which provides for the grant of options to purchase
               Ordinary shares to employees of the Company.

               Since 1993, LanOptics has granted options to purchase ordinary
               shares to key employees, directors and shareholders pursuant to
               the LanOptics 1992 Stock Option Plan as an incentive to attract
               and retain qualified personnel. Under the terms of these grants,
               options, generally, become exercisable ratably over a four-year
               period commencing with the date of grant. The options generally
               expire no later than six years from the date of the grant, and
               are non-transferable, except under the laws of succession.
               LanOptics' 1992 Israeli Stock Option Plan expired in November
               2002. There were approximately 140,000 options for ordinary
               shares that remained unissued upon the expiration of the 1992
               Plan.

               In October 2003, LanOptics adopted the 2003 Israeli Share Option
               Plan (the "2003 Israel Plan") under which a total of 90,000
               ordinary shares of the Company were reserved and authorized for
               issuance. Options under the 2003 Israel Plan are issued to
               Israeli employees, directors, consultants, advisers and service
               providers of the Company and its subsidiaries. The 2003 Israel
               Plan provides for the options granted to have a maximum exercise
               period of ten years from the date of grant. Options granted under
               the 2003 Israel Plan are generally exercisable over four years.
               Options that are not exercised will become available for further
               grant by the Board under the 2003 Israel Plan.

               Transactions related to the grant of options to employees under
               the above plans during the years ended December 31, 2004, 2003
               and 2002, were as follows:

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                        ---------------------------------------------------------------------
                                                 2004                    2003                    2002
                                        ---------------------   ---------------------   ---------------------
                                                     WEIGHTED                WEIGHTED                WEIGHTED
                                                      AVERAGE                 AVERAGE                 AVERAGE
                                          NUMBER     EXERCISE     NUMBER     EXERCISE     NUMBER     EXERCISE
                                        OF OPTIONS     PRICE    OF OPTIONS     PRICE    OF OPTIONS     PRICE
                                        ----------   --------   ----------   --------   ----------   --------
<S>                                      <C>          <C>        <C>          <C>        <C>          <C>
               Outstanding at
                  beginning of year      313,989      $ 5.00     258,739      $ 4.01     294,989      $ 3.92

               Granted                        --          --      90,250      $ 6.93          --      $   --
               Exercised                  (7,750)     $ 5.21     (35,000)     $ 2.68     (21,250)     $ 2.50
               Forfeited                      --          --          --      $   --     (15,000)     $ 4.25
                                         -------                 -------                 -------

               Outstanding at end of
                  year                   306,239      $ 4.99     313,989      $ 5.00     258,739      $ 4.01
                                         =======      ======     =======      ======     =======      ======

               Exercisable options at
                  end of year            266,239      $ 5.74     238,989      $ 4.45     247,239      $ 4.00
                                         =======      ======     =======      ======     =======      ======
</Table>

                                      F-33
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)

               The options outstanding as of December 31, 2004, have been
               separated by exercise prices, as follows:

<Table>
<Caption>
                             OPTIONS       WEIGHTED       OPTIONS
                           OUTSTANDING     AVERAGE      EXERCISABLE
                              AS OF       REMAINING        AS OF
               EXERCISE   DECEMBER 31,   CONTRACTUAL   DECEMBER 31,
               PRICE          2004           LIFE          2004
               --------   ------------   -----------   ------------
                                           (YEARS)
                                         -----------
<S>                          <C>             <C>          <C>
               $ 2.5           5,250         2.32           5,250
               $ 4.15         16,250         1.87          16,250
               $ 4.234       194,739         5.00         194,739
               $ 6.93         90,000         8.84          50,000
                             -------         ----         -------
                             306,239         7.25         266,239
                             =======         ====         =======
</Table>

               Weighted average fair values and weighted average exercise prices
               of options whose exercise price is equal to the market price of
               the shares at date of grant are as follows:

<Table>
<Caption>
                                                        EXERCISE PRICES THAT EQUAL MARKET PRICE
                                                                    ON DATE OF GRANT
                                                        ---------------------------------------
                                                                      DECEMBER 31,
                                                        ---------------------------------------
                                                            2004          2003          2002
                                                        -----------   -----------   -----------
<S>                                                         <C>          <C>            <C>
               Weighted average exercise price              $ --         $ 6.93         $ --
               Weighted average fair value on date of
                  grant                                     $ --         $ 3.43         $ --
</Table>

               Stock options of subsidiary:

               In 2000, EZchip adopted option plans (the "Option Plans") which
               provide for the grant of options to purchase shares of EZchip to
               employees of EZchip.

               Since 2000, EZchip has granted options to purchase its ordinary
               shares to key employees, shareholders and directors pursuant to
               Israeli and the U.S. stock option plans (the "2000 Section 102
               Share Option Plan", the "2003 Section 102 Share Option Plan" and
               the "2001 U.S. Stock Option Plan") as an incentive to attract and
               retain qualified personnel. Under these plans a total of
               11,500,000 ordinary shares of EZchip are reserved and authorized
               for issuance. Under the terms of these grants, options generally
               become exercisable over a four-year period, commencing with the
               date of grant. The options generally expire 7 to 10 years from
               the date of the grant, and are non-transferable, except under the
               laws of succession.

                                      F-34
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)

               The following table is a summary of activity (except options to
               consultants) for EZchip's stock option plans:

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                        ---------------------------------------------------------------------
                                                 2004                    2003                    2002
                                        ---------------------   ---------------------   ---------------------
                                                     WEIGHTED                WEIGHTED                WEIGHTED
                                                      AVERAGE                 AVERAGE                 AVERAGE
                                          NUMBER     EXERCISE      NUMBER    EXERCISE      NUMBER    EXERCISE
                                        OF OPTIONS     PRICE    OF OPTIONS    PRICE     OF OPTIONS    PRICE
                                        ---------    --------   ----------   --------   ----------   --------
<S>                                     <C>           <C>       <C>           <C>       <C>           <C>
               Outstanding at
                  beginning of year      8,180,474    $ 0.71    5,475,024     $ 0.66    5,492,211     $ 0.65

               Granted                   2,522,625    $ 0.80    2,810,732     $ 0.82       90,000     $ 1.00
               Exercised                        --                (26,250)    $ 1.00           --         --
               Forfeited                   (47,688)   $ 0.81      (79,032)    $ 0.94    ( 107,187)    $ 0.79
                                        ----------    ------    ---------     ------    ---------     ------

               Outstanding at end of
                  year                  10,655,411    $ 0.73    8,180,474     $ 0.71    5,475,024     $ 0.66
                                        ==========    ======    =========     ======    =========     ======

               Exercisable options at
                  end of year            6,516,475    $ 0.67    4,653,275     $ 0.60    3,236,149     $ 0.53
                                        ==========    ======    =========     ======    =========     ======
</Table>

               The options outstanding as of December 31, 2004, have been
               separated into exercise prices as follows:

<Table>
<Caption>
                             OPTIONS       WEIGHTED       OPTIONS
                           OUTSTANDING     AVERAGE      EXERCISABLE
                              AS OF       REMAINING        AS OF
               EXERCISE   DECEMBER 31,   CONTRACTUAL   DECEMBER 31,
                 PRICE        2004       LIFE (YEARS)      2004
               --------   ------------   -----------   ------------
<S>                        <C>               <C>         <C>
               $ 0.4        2,930,938        2.34        2,930,938
               $ 0.72         431,344        2.40          431,344
               $ 0.80       2,479,219        9.62          543,905
               $ 0.82       2,715,387        8.78          759,558
               $ 1.00       2,098,523        4.47        1,850,730
                           10,655,411        6.10        6,516,475
                           ==========        ====        =========
</Table>

               Weighted average fair values and weighted average exercise prices
               of options whose exercise price is equal to the market price of
               the shares at date of grant are as follows:

<Table>
<Caption>
                                                        EXERCISE PRICES THAT EQUAL MARKET PRICE
                                                                    ON DATE OF GRANT
                                                        ---------------------------------------
                                                                      DECEMBER 31,
                                                        ---------------------------------------
                                                            2004          2003          2002
                                                        -----------   -----------   -----------
<S>                                                        <C>           <C>           <C>
               Weighted average exercise price             $ 0.8         $ 0.82        $ 1.00
               Weighted average fair value on date of
                  grant                                    $ 0.34        $ 0.35        $ 0.41
</Table>

                                      F-35
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)

               The subsidiary's outstanding options to consultants as of
               December 31, 2004, are as follows:

<Table>
<Caption>
                                NUMBER OF    EXERCISE
                                OPTIONS    PRICE PER     OPTIONS     EXERCISABLE
               ISSUANCE DATE     GRANTS      SHARE     EXERCISABLE     THROUGH
               -------------   ---------   ---------   -----------   -----------
<S>                              <C>         <C>          <C>          <C>
               May 2000          15,000      $ 0.72       15,000       May 2007
</Table>

NOTE 14:- TAXES ON INCOME

          a.   Measurement of taxable income under the Income Tax (Inflationary
               Adjustments) Law, 1985:

               Results for tax purposes in Israel are measured in terms of
               earnings in NIS after certain adjustments for changes in Israel's
               Consumer Price Index ("CPI"). As explained in Note 2b, the
               financial statements are measured in U.S. dollars. The difference
               between the annual change in Israel's CPI and in the NIS/dollar
               exchange rate causes a further difference between taxable income
               and the income before taxes shown in the financial statements. In
               accordance with paragraph 9(f) of SFAS No. 109, the Company has
               not provided deferred income taxes on the difference between the
               functional currency and the tax bases of assets and liabilities.

          b.   Tax benefits under the Law for the Encouragement of Capital
               Investments, 1959 ("the Law"):

               In 2000, EZchip Ltd. was granted "Approved Enterprise" status
               under the Law.

               According to the provisions of the Law, EZchip has chosen to
               enjoy the "Alternative Benefits" track and, accordingly, its
               income from the "Approved Enterprise will be tax-exempt for a
               period of 10 years commencing with the year in which it first
               earns taxable income.

               Due to the reported losses, the benefit period has not commenced.
               The period of tax benefits is subject to limits of the earlier of
               12 years from the commencement of production, or 14 years, from
               the approval date. Given the aforementioned conditions, the
               period of tax benefits will terminate 2013.

               The entitlement to the above benefits is conditional upon EZchip
               fulfilling the conditions stipulated by the above Law,
               regulations published there under and the letters 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 EZchip may be required to refund the amount of the
               benefits, in whole or in part including interest.

                                      F-36
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 14:- TAXES ON INCOME (CONT.)

               As of December 31, 2004, management believes that EZchip is
               meeting all of the aforementioned conditions.

               In the event of a distribution of cash dividends from income that
               is tax-exempt as mentioned above, EZchip would have to pay income
               tax equal to 25% of the amount distributed. Moreover, dividends
               from the "Approved Enterprise" are taxable at the reduced rate of
               15% if distributed during the tax exemption period or within 12
               years thereafter. EZchip currently has no plans to distribute
               dividends and intends to retain future earnings to finance the
               development of its business.

               Should EZchip derive income from sources other than the "Approved
               Enterprise" during the relevant period of benefits, such income
               will be taxable at the regular corporate tax rate of36% until
               2003, 35% in 2004, 34% in 2005, 32% in 2006 and 30% in 2007 and
               thereafter.

          c.   Net operating losses carryforwards:

               The Company and EZchip have a tax loss carryforward resulting
               from the years up to and including 2004 amounting to
               approximately $50,943, which may be carried forward indefinitely.

               EZchip Inc. is subject to U.S. income taxes and has a loss
               carryforward resulting from the years up to and including 2004
               amounting to approximately $ 3,334.

               Utilization of the U.S. net operating losses may be subject to
               substantial annual limitation due to the "change in ownership"
               provisions of the Internal Revenue Code of 1986 and similar state
               provisions. The annual limitation may result in the expiration of
               net operating losses before utilization.

          d.   Loss before taxes is comprised as follows:

<Table>
<Caption>
                                      YEAR ENDED DECEMBER 31,
                                   -----------------------------
                                     2004      2003       2002
                                   -------   --------   --------
<S>                                <C>       <C>        <C>
               Domestic (Israel)   $ 8,150   $  9,121   $ 13,236
               Foreign               1,004      1,283      1,118
                                   -------   --------   --------

                                   $ 9,154   $ 10,404   $ 14,354
                                   =======   ========   ========
</Table>

                                      F-37
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 14:- TAXES ON INCOME (CONT.)

          e.   Deferred taxes:

               Deferred income taxes reflect the net tax effects of temporary
               differences between the carrying amounts of assets and
               liabilities for financial reporting purposes and the amounts used
               for income tax purposes. The Company and its subsidiaries'
               deferred tax assets are comprised of operating loss carryforwards
               and other temporary differences. Significant components of the
               Company and its subsidiaries deferred tax assets are as follows:

<Table>
<Caption>
                                                                    DECEMBER 31,
                                                                -------------------
                                                                  2004       2003
                                                                --------   --------
<S>                                                             <C>        <C>
               Accrued vacation pay and severance pay           $     67   $     50
               Loss carryforward                                   7,225      6,925
                                                                --------   --------

               Deferred tax assets before valuation allowance      7,292      6,975
               Less - valuation allowance                         (7,292)    (6,975)
                                                                --------   --------

               Net deferred tax assets                          $     --   $     --
                                                                ========   ========
</Table>

               The Company and its subsidiaries have provided valuation
               allowances in respect of deferred tax assets resulting from
               operating loss carryforwards and other temporary differences.
               Management currently believes that since the Company and its
               subsidiaries have a history of losses it is more likely than not
               that the deferred tax regarding the loss carryforwards and other
               temporary differences will not be realized in the foreseeable
               future.

          f.   Reconciliation of the theoretical tax expense (benefit) to the
               actual tax expense (benefit):

               The main reconciling items between the statutory tax rate of the
               Company and the effective tax rate are the non-recognition of tax
               benefits from accumulated net operating losses carryforward of
               the Company and it's subsidiaries due to the uncertainty of the
               realization of such tax benefits.

                                      F-38
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 15:- SEGMENTS AND GEOGRAPHIC INFORMATION

          a.   Segment information:

               The Company manages its business on the basis of one reportable
               segment. See Note 1a for a brief description of the Company's
               business.

          b.   The following presents total revenues for the years ended
               December 31, 2004, 2003 and 2002 based on the location of and
               customers and long-lived assets as of December 31, 2004, 2003 and
               2002:

<Table>
<Caption>
                                      2004                 2003                    2002
                               ------------------   ------------------   ------------------
                                 TOTAL     LONG-      TOTAL     LONG-      TOTAL     LONG-
                               REVENUES    LIVED    REVENUES    LIVED    REVENUES    LIVED
                                           ASSETS               ASSETS               ASSETS
                               --------   -------   --------   -------   --------   -------
<S>                             <C>       <C>        <C>       <C>         <C>      <C>
               Israel           $ 1,503   $ 1,491    $   271   $ 1,955     $ 185    $ 2,615
               Far East           1,065        --        993        --       275         --
               North America      2,158         3        434         4         5         10
               Others                21                   58        --        --         --
                                -------   -------    -------   -------     -----    -------

                                $ 4,746   $ 1,494    $ 1,756   $ 1,959     $ 465    $ 2,625
                                =======   =======    =======   =======     =====    =======
</Table>

          c.   Major customer data as a percentagof total revenues:

<Table>
<Caption>
                            YEAR ENDED DECEMBER 31,
                            -----------------------
                             2004     2003    2002
                            ------   -----   ------
<S>                           <C>     <C>      <C>
               Customer A      5%      3%      11%
               Customer B     41%      4%      37%
               Customer C      1%     13%       1%
               Customer D      3%      9%      10%
               Customer E      3%     22%      14%
               Customer F     11%      1%      --
</Table>

                                      F-39
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 16:- FINANCIAL INCOME (EXPENSES)

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                            -----------------------
                                                             2004     2003     2002
                                                            ------   ------   -----
<S>                                                         <C>      <C>      <C>
          Income:
             Interest income                                $  270   $  207   $ 566
             Foreign currency translation adjustments           --        3      76
             Other income                                        1       --      --
                                                            ------   ------   -----

          Total income                                         271      210     642
                                                            ------   ------   -----
          Expenses:
             Interest and bank charges                         (36)      (8)     (4)
             Foreign currency translation adjustments          (25)      --      --
             Amortization of discount on long-term loan        (88)     (59)     --
             Interest on a long-term loan                      (56)     (54)     --
             Interest on Redeemable Preferred shares in a
                subsidiary                                    (804)    (504)     --
             Other expenses                                     --       (3)     --
                                                            ------   ------   -----

          Total expenses                                    (1,009)    (628)     (4)
                                                            ------   ------   -----

          Net financial income (expenses)                   $ (738)  $ (418)  $ 638
                                                            ======   ======   =====
</Table>

NOTE 17:- BALANCE AND TRANSACTIONS WITH RELATED PARTIES

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                               2004     2003    2002
                                                              ------   -----   ------
<S>                                                            <C>     <C>      <C>
          Legal expenses:
             Legal expenses payable                            $ --    $  --    $ 178
                                                               ====    =====    =====
             Professional fees to an entity controlled by a
                shareholder                                    $ --    $ 123    $  79
                                                               ====    =====    =====
</Table>

          The related party of 2003 and 2002 is holding as held less than 5% of
          the Company's Ordinary shares in 2004, and was not considered a
          related party in 2004.

                                      F-40
<Page>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

NOTE 18:- SUBSIDIARIES

<Table>
<Caption>
                                                               PERCENTAGE    JURISDICTION OF
                                                              OF OWNERSHIP    INCORPORATION
                                                              ------------   ---------------
                                                                   (%)
                                                              ------------
<S>                                                               <C>             <C>
          EZchip Ltd.(1)                                          53.4            Israel
          EZchip Inc.(2)                                           100            U.S.A.
          LanOptics Inc. - inactive as of February 2002            100            U.S.A.
          LanOptics PLC - inactive as of June 2000                 100             U.K.
          NetGuard Ltd. - inactive as of February 2001            92.5            Israel
          NetGuard Inc.(3) - inactive as of November 2000          100            U.S.A.
          NetGuard PLC(3) - inactive as of February 2001           100             U.K.
          NetXchange Ltd. -inactive as of December 1998             90            Israel
          NetXchange Inc.(4) -inactive as of September 1998        100            U.S.A.
</Table>

          (1)  Represents the aggregate percentage of holdings in different
               classes of EZchip securities.

          (2)  Represents the percentage of holdings of EZchip Ltd.

          (3)  Represents the percentage of holdings of NetGuard Ltd.

          (4)  Represents the percentage of holdings of NetXchange Ltd.

                                   ----------

                                      F-41
<Page>

ITEM 19. EXHIBITS

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

      1.1        Articles of Association of LanOptics Ltd., incorporated by
                 reference to Exhibit 3.2 to Amendment No. 1 to the
                 Registration Statement of LanOptics Ltd. on Form F-1
                 (Registration No. 33-52676).

     10.1        Custom Sales Agreement No. 000590 between E.Z. Chip
                 Technologies Ltd. and International Business Machines
                 Corporation, incorporated by reference to Exhibit 10.1 to our
                 Form 20-F for the fiscal year ended December 31, 2000.

     12.1        Certification of Chief Executive Officer pursuant to Rule
                 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
                 as amended.

     12.2        Certification of Chief Financial Officer pursuant to Rule
                 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
                 as amended.

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

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

     23.1        Consent of Kost Forer Gabbay & Kasierer

                                       74
<Page>

                                   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.

                                 LANOPTICS LTD.


                                      BY: /S/ MEIR D. BURSTIN
                                          ----------------------------------
                                          DR. MEIR D. BURSTIN
                                          CHAIRMAN OF THE BOARD OF DIRECTORS

DATED MARCH 31, 2005

                                       75