---

---

# SECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

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

# OR

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

For the fiscal year ended December 31, 2007

# OR

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

# For the transition
period from __________ to __________

# OR

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

Date of event requiring this shell company report .................

# Commission file number
0-20860



LANOPTICS LTD.(Exact name of Registrant as specified in its charter and
translation of Registrants name into English)

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:

|                                    |                                          
|----------------------------------- | -----------------------------------------
|
|
|
|
|Title of each class                 | Name of each exchange on which registered
|Ordinary Shares, NIS 0.02 Par Value | NASDAQ Global Market                     

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

Securities for which there is a reporting obligation pursuant to section 15(d) of the act: None

Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock as of the close of
the period covered by the annual report:

18,312,245 Ordinary Shares, par value NIS 0.02 per share (as of December 31, 2007)

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

Yes o No x

If this report is an annual or
transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

Yes o No x



---

---

Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act.

Large Accelerated filer o    Accelerated filer x Non-accelerated filer o

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

Item 17 o Item 18 x

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

Yes o No x

This annual report on Form 20-F is being incorporated by reference into the Registrant's Form F-3
Registration Statements File Nos. 333-112136, 333-121611, 333-126416, 333-139707 and 333-149063 and Form
S-8 Registration Statements File Nos. 33-71822, 333-134593, 333-148932 and 333-148933.



---

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TABLE OF CONTENTS

|         |                                                         |   
|-------- | ------------------------------------------------------- | --
|
|
|
|
|PART I   |                                                         | 6 
|ITEM 1.  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   | 6 
|ITEM 2.  | OFFER STATISTICS AND EXPECTED TIMETABLE                 | 6 
|ITEM 3.  | KEY INFORMATION                                         | 6 
|A.       | Selected Consolidated Financial Data                    | 6 
|B.       | Capitalization and Indebtedness                         | 7 
|C.       | Reasons for the Offer and Use Of Proceeds               | 7 
|D.       | Risk Factors                                            | 7 
|ITEM 4.  | INFORMATION ON THE COMPANY                              | 15
|A.       | History and Development of the Company                  | 15
|B.       | Business Overview                                       | 16
|C.       | Organizational Structure                                | 24
|D.       | Property, Plants and Equipment                          | 24
|ITEM 4A. | UNRESOLVED STAFF COMMENTS                               | 25
|ITEM 5.  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS            | 25
|A.       | Operating Results                                       | 25
|B.       | Liquidity and Capital Resources                         | 34
|C.       | Research and Development, Patents and Licenses          | 35
|D.       | Trend Information                                       | 36
|E.       | Off-Balance Sheet Arrangements                          | 37
|F.       | Tabular Disclosure of Contractual Obligations           | 37
|ITEM 6.  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES              | 37
|A.       | Directors and Senior Management                         | 37
|B.       | Compensation of Directors and Officers                  | 39
|C.       | Board Practices                                         | 39
|D.       | Employees                                               | 45
|E.       | Share Ownership                                         | 46
|ITEM 7.  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS       | 47
|A.       | Major Shareholders                                      | 47
|B.       | Related Party Transactions                              | 49
|C.       | Interests of Experts and Counsel                        | 50
|ITEM 8.  | FINANCIAL INFORMATION                                   | 50
|A.       | Consolidated Statements and Other Financial Information | 50
|B.       | Significant Changes                                     | 51
|ITEM 9.  | THE OFFER AND LISTING                                   | 51
|A.       | Offer and Listing Details                               | 51
|B.       | Plan of Distribution                                    | 52
|C.       | Markets                                                 | 52
|D.       | Selling Shareholders                                    | 52
|E.       | Dilution                                                | 52
|F.       | Expense of the Issue                                    | 52
|ITEM 10. | ADDITIONAL INFORMATION                                  | 52
|A.       | Share Capital                                           | 52
|B.       | Memorandum and Articles Of Association                  | 52
|C.       | Material Contracts                                      | 54
|D.       | Exchange Controls                                       | 54
|E.       | Taxation                                                | 55
|F.       | Dividend and Paying Agents                              | 63
|G.       | Statement by Experts                                    | 63
|H.       | Documents on Display                                    | 63
|I.       | Subsidiary Information                                  | 63



---

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|ITEM 11.   | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 63
|---------- | ---------------------------------------------------------------------------- | --
|ITEM 12.   | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 64
|PART II    |                                                                              | 64
|ITEM 13.   | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 64
|ITEM 14.   | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 64
|ITEM 15.   | CONTROLS AND PROCEDURES                                                      | 64
|ITEM 16.   | [RESERVED]                                                                   | 65
|ITEM 16A.  | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 65
|ITEM 16B.  | CODE OF ETHICS                                                               | 65
|ITEM 16C.  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 66
|ITEM 16D.  | EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS                      
|           | FOR AUDIT COMMITTEES                                                         | 66
|ITEM 16E.  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 66
|PART III   |                                                                              | 66
|ITEM 17.   | FINANCIAL STATEMENTS                                                         | 66
|ITEM 18.   | FINANCIAL STATEMENTS                                                         | 67
|ITEM 19.   | EXHIBITS                                                                     | 67
|SIGNATURES |                                                                              | 68



---

---

# 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 to improve the connectivity and
performance of corporate Local Area Networks and Wide Area Networks. Our business now
consists exclusively of the business of our subsidiary, EZchip Technologies Ltd., or
EZchip, a company that is engaged in the development and marketing of Ethernet network
processors for networking equipment. We currently own approximately 99% of the outstanding
shares of EZchip and approximately 89% of EZchip on a fully diluted basis, taking into
account EZchip options and shares held by current and former employees. As used in this
Annual Report, the terms we, us, our and our
company mean LanOptics and its EZchip subsidiary taken together, unless otherwise
expressly stated. Our ordinary shares are traded on the NASDAQ Global Market and on the
Tel-Aviv Stock Exchange under the symbol EZCH.

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 U.S. GAAP. Commencing January 1, 2004, we adopted U.S. GAAP for the preparation
of our consolidated financial statements. For periods prior to January 1, 2004, 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 U.S. 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 on December 31,
2007 as published by the Bank of Israel was NIS 3.846 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.

This
Annual Report on Form 20-F contains various forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, and within the Private Securities
Litigation Reform Act of 1995, as amended. Such forward-looking statements reflect our
current view with respect to future events and financial results. Forward-looking
statements usually include the verbs, anticipates, believes,
estimates, expects, intends, plans,
projects, understands and other verbs suggesting uncertainty. We
remind readers that forward-looking statements are merely predictions and therefore
inherently subject to uncertainties and other factors and involve known and unknown risks
that could cause the actual results, performance, levels of activity, or our achievements,
or industry results, to be materially different from any future results, performance,
levels of activity, or our achievements expressed or implied by such forward-looking
statements. Readers 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.
We have attempted to identify additional significant uncertainties and other factors
affecting forward-looking statements in the Risk Factors section which appears in Item 3.D
Key Information -Risk Factors.



---

---

PART I

|ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- | -----------------------------------------------------

Not
applicable.

|ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- | ---------------------------------------

Not
applicable.

|ITEM 3. | KEY INFORMATION
|------- | ---------------

|A. | SELECTED
CONSOLIDATED FINANCIAL DATA
|-- | ------------------------------------

The
 following  selected  consolidated  financial  data of our  company  have  been  prepared
 in accordance  with U.S.  GAAP,  and are  derived  from our audited  consolidated
 financial  statements  and accompanying  notes.  The selected  financial data set forth
in the table below have been derived from our audited  historical  financial  statements
 for the years 2003 to 2007.  The selected  income data for the years ended  December,
 31, 2005,  2006 and 2007,  and the selected  balance sheet data as at December 31, 2006
and 2007, have been derived from our audited consolidated  financial statements set forth
in "Item 18 - Financial  Statements."  The selected income data for the years ended
 December,  31, 2003 and 2004, and the  selected  balance  sheet data as at December  31,
 2003,  2004 and 2005,  have been  derived from our previously  published audited
 consolidated  financial  statements,  which are not included in this Annual Report.  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.

|                                           | Year Ended December 31,
|------------------------------------------ | -----------------------
|
|
|
|
|Statement of Operations Data:              |                        
|Revenues                                   |                        
|Operating loss                             |                        
|Net loss                                   |                        
|Per share data:                            |                        
|Net loss per share (basic and diluted)     |                        
|Weighted average number of ordinary shares |                        
|used in computing net loss per share       |                        
|                                           |                        
|Balance Sheet Data:                        |                        
|Working capital                            |                        
|Total assets                               |                        
|Long-term liabilities                      |                        
|Preferred shares of a subsidiary           |                        
|Shareholders' equity (deficiency)          |                        

6

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---

# 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.

|Period                                | Average | High | Low | At PeriodEnd
|------------------------------------- | ------- | ---- | --- | ------------
|
|
|
|
|Twelve months ended December 31, 2003 |         |      |     | 4.5483      
|Twelve months ended December 31, 2004 |         |      |     | 4.4823      
|Twelve months ended December 31, 2005 |         |      |     | 4.4878      
|Twelve months ended December 31, 2006 |         |      |     | 4.4565      
|Twelve months ended December 31, 2007 |         |      |     | 4.1081      

|Period                              | High | Low
|----------------------------------- | ---- | ---
|
|
|
|
|October 2007                        |      |    
|November 2007                       |      |    
|December 2007                       |      |    
|January 2008                        |      |    
|February 2008                       |      |    
|March 2008 (through March 27, 2008) |      |    

At
March 27, 2008 the representative rate of exchange was NIS 3.500 = $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.

|D. | 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 industry, with our first product
sales in the second quarter of 2002 and total sales through December 31, 2007 of
approximately $41 million. We have incurred operating losses in each of the five last
fiscal years. 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:

| |  | expand
and enhance our product offerings;
| | - | -----------------------------------------

| |  | increase
our revenues;
| | - | ----------------------

7

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| |  | diversify
our sources of revenue;
| | - | ---------------------------------

| |  | respond
to technological changes; and
| | - | -------------------------------------

| |  | 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.

Although
there are many companies operating in the networking equipment market, a significant
portion of the market is controlled by a limited number of companies. The growth of our
network processor business depends in part on increased acceptance and use of networking
equipment that is developed and manufactured by companies with significant market share.
We depend on the ability of our target customers, specifically those with a significant
share of the networking equipment market, 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 packet-based converged telecom
networks, in particular carrier Ethernet networks, as well as 10 Gigabit and greater
Ethernet technologies that enable the forwarding of data at a high speed. Ultimately, the
development rate of these technologies may be slower than we anticipate. If the use of
such networking equipment does not grow as we anticipate, if we are unsuccessful in
maintaining our relationships with our current customers, specifically those with a
significant share of the networking equipment market, and creating relationships with
other target customers with significant market share, 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.

We depend on a very limited number
of key customers. If we are unable to maintain our relationship with these customers, our
future revenues and growth will be materially adversely affected.

Two
major tier-1 vendors of carrier Ethernet switches and routers, or CESRs, are currently
designing several of their CESR platforms based on EZchip network processors. Juniper
Networks, currently our largest customer, has already entered production with NP-2 based
products and is expected to continue to launch additional NP-2 and NP-3 based products
during 2008. Juniper Networks accounted for approximately 42% of our 2007 revenues and we
expect Juniper Networks to account for more than 50% of our revenues in 2008. The second
major tier-1 vendor of CESRs has selected a customized version of NP-3 for several of its
CESR product lines. This version of NP-3 is in its final stages of development and we
expect it to move into production in the second half of 2008. We expect that these two
CESR vendors will, together, account for a substantial majority of our revenues in 2008.

Our
future revenues and growth will depend in large part on our relationship with these two
CESR vendors in 2008 and beyond. If one of these vendors decides not to incorporate our
products into its CESR products or purchases significantly lower quantities than expected,
or if the products that incorporate our network processors are not commercially
successful, our future revenues and the growth of our business will be materially
adversely affected.

We may experience difficulties or
delays in the introduction of our new family of network processors and other new and
enhanced products.

We
recently announced a new family of network processors targeting Ethernet Access
applications. We expect several models of the network processors, named NPA, to be offered
in 2008. The NPA product family addresses the transition of carrier access from ATM/TDM
based networks to Ethernet packet-based networks and the provisioning of triple-play
services that command increased bandwidth and service guarantees to residential and
business users. We may not be successful in developing, introducing and marketing these
new offerings or in addressing all or any portion of the potential market for these
offerings. We may experience difficulties that could delay or prevent the successful
development, introduction and marketing of these offerings. Furthermore, our new offerings
may not adequately meet the requirements of the marketplace or achieve market acceptance.
If we do not timely develop and introduce these offerings or respond in a timely manner to
changing market conditions or customer requirements, the growth of our business may be
adversely affected.

8

---

---

In
addition, the development of our NP-3, NP-4 and NPA network processors is a complex and
uncertain process. We are engaged in the development of very advanced technologies. We may
experience design, manufacturing, marketing and other difficulties that could delay the
development or marketing of these network processors. The difficulties could result in
reduced sales, loss of existing and potential customers, unexpected expenses or delays in
the launch of these network processors, all which may adversely affect our results of
operations.

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. In
addition, we face competition from current and prospective customers who may choose to
develop their own network processors.

Additionally,
many of our competitors also have well-established relationships with our prospective
customers and suppliers and prospective customers may have competitive reasons to prefer
our competitors. 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 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.

9

---

---

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 newly developed 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 their equipment incorporating our network processors, 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 in the design and test
of functions used to develop Ethernet network processors 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 from an increasing number of emerging startup companies
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.

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.

10

---

---

If third-party manufacturers and
other suppliers terminate our arrangement with them, or amend them in a manner detrimental
to us, we may experience delays in production and our business maybe adversely affected.

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.

We
have entered into an agreement with a sole supplier for the manufacture of each existing
model of our network processors, and we expect to use a sole supplier for our next
generation of network processors as well. Our NP-1, NP-1c and NP-3 network processors are
manufactured by IBM. Our NP-2 network processor is manufactured by Taiwan Semiconductor
Manufacturing Co., or TSMC, for a third party that coordinates and assumes responsibility
for various aspects of the manufacturing process and also arranges for the manufacture. We
also expect the NPA to be manufactured by TSMC, through a third party that will manage the
supply chain for us. We recently entered into a partnership with Marvell Technology Group
Ltd. to jointly develop, market and sell next generation network processor unit solutions,
which will also be manufactured by TSMC. IBM, TSMC or any future sole supplier for our
current and future products may reduce or delay shipment if its ability to manufacture
network processors is constrained. If a sole supplier of our network processors, a third
party that arranges for their manufacture, or any other subcontractor fails to deliver
network processors or necessary components or services on time or at all, our business
could be severely harmed. In addition, if the current manufacturing arrangement between
our third party subcontractor and TSMC is terminated or amended in a manner detrimental to
us, it could adversely affect our business while we try to make alternative arrangements
with substitute suppliers.

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.

We have a history of operating
losses and may not achieve or sustain profitability in the future. 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 business and
the present economic environment, we believe that we have sufficient funding resources to
finance our operations for at least 12 months. The capital markets have experienced severe
downturns over the last decade, especially relating to technology companies, and access to
capital has at times been both difficult and expensive.

We
have incurred operating losses in each of the last five fiscal years and we may not be
able to achieve or sustain profitable operations in the future. 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.

# Risks Relating to Our
Ordinary Shares

Our share price has been highly
volatile and may continue to be volatile and decline.

The
trading price of our shares has fluctuated widely in the past, including in recent months
and weeks, and may continue to do so in the future as a result of a number of factors,
many of which are outside our control. In addition, the stock market has experienced
extreme price and volume fluctuations that have affected the market prices of many
technology companies, particularly telecommunication and Internet-related companies, and
have often been unrelated or disproportionate to the operating performance of these
companies. These broad market fluctuations could adversely affect the market price of our
shares. In the past, following periods of volatility in the market price of a particular
companys securities, securities class action litigation has often been brought
against that company. Securities class action litigation could result in substantial costs
and a diversion of our managements attention and resources.

11

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Your ownership interest in
LanOptics may be diluted as a result of anticipated further purchases of EZchip shares or
as a result of additional financings.

We
currently own approximately 99% of the outstanding shares of EZchip and approximately 89%
of EZchip on a fully diluted basis, taking into account EZchip options and shares held by
current and former employees. We intend to continue to purchase EZchip shares in order to
gain full ownership of EZchip. We will attempt to effect all such purchases at an exchange
ratio that reflects the relative values of LanOptics and EZchip. If we are required to pay
a purchase price that is greater than the relative value of EZchip, the ownership
interests of LanOptics existing shareholders will be diluted. In addition, we may seek to
raise funds from time to time in public or private issuances of equity, and such
financings may take place in the near future or over the longer term. Any such financing
may dilute the relative holdings of current LanOptics shareholders.

Future exercises of our options
and warrants may result in substantial dilution and future sales of these ordinary shares
and sales by our principal shareholders may cause the market price of our ordinary shares
to decline.

Future
exercises of our options and warrants may result in substantial dilution and future sales
of these ordinary shares and sales by our principal shareholders may cause the market
price of our ordinary shares to decline. We cannot predict what effect, if any, future
sales of our ordinary shares, or the availability of our ordinary shares for future sale,
will have on the market price of our ordinary shares. Sales of substantial amounts of our
ordinary shares in the public marketplace by us or our shareholders, including our
principal shareholders whose shares were recently registered for resale with the
Securities and Exchange Commission, or the perception that such sales could occur, could
adversely affect the market price of our ordinary shares and may make it more difficult
for investors to sell ordinary shares at a time and price which such investors deem
appropriate.

We have never paid cash dividends
and have no intention to pay dividends in the foreseeable future.

We
have never paid cash dividends on our shares and do not anticipate paying any cash
dividends in the foreseeable future. We intend to retain earnings, if any, for use in our
business, in particular to fund our research and development, which are important to
capitalize on technological changes and develop new products and applications. Any future
dividend distributions are subject to the discretion of our board of directors and will
depend on various factors, including our operating results, future earnings, capital
requirements, financial condition, tax implications of dividend distributions on our
income, future prospects and any other factors deemed relevant by our board of directors.
The distribution of dividends also may be limited by Israeli law, which permits the
distribution of dividends only out of retained earnings or otherwise upon the permission
of the court. You should not rely on an investment in our company if you require dividend
income from your investment.

Our ordinary shares are traded on
more than one market and this may result in price variations.

Our
ordinary shares are traded primarily on the NASDAQ Global Market and also on the Tel Aviv
Stock Exchange. Trading in our ordinary shares on these markets is made in different
currencies (U.S. dollars on the NASDAQ Global Market, and New Israeli Shekels, or NIS, on
the Tel Aviv Stock Exchange), and at different times (resulting from different time zones,
different trading days and different public holidays in the United States and Israel).
Consequently, the trading prices of our ordinary shares on these two markets often differ.
Any decrease in the trading price of our ordinary shares on one of these markets could
cause a decrease in the trading price of our ordinary shares on the other market.

We may fail to maintain effective
internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which
could have an adverse effect on our financial results and the market price of our ordinary
shares.

The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.
Our efforts to comply with the requirements of Section 404, which started in connection
with our 2006 Annual Report on Form 20-F, have resulted in increased general and
administrative expense and a diversion of management time and attention, and we expect
these efforts to require the continued commitment of resources. Section 404 of the
Sarbanes-Oxley Act requires (i) managements annual review and evaluation of our
internal control over financial reporting and (ii) a statement by management that its
independent registered public accounting firm has issued an attestation report on our
internal control over financial reporting, in connection with the filing of the Annual
Report on Form 20-F for each fiscal year. We have documented and tested our internal
control systems and procedures and have made improvements in order for us to comply with
the requirements of Section 404. If we fail to maintain the adequacy of our internal
controls, we may not be able to ensure that we can conclude on an ongoing basis that we
have effective internal controls over financial reporting. Failure to maintain effective
internal controls over financial reporting could result in investigation or sanctions by
regulatory authorities, and could have a material adverse effect on our operating results,
investor confidence in our reported financial information, and the market price of our
ordinary shares.

12

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# Risks Relating To Our
Location In Israel

Political, economic and military
instability in Israel may disrupt our operations and negatively affect our sales.

We
are incorporated under the laws of the State of Israel, and our principal executive
offices and principal research and development facilities are located in Israel.
Political, economic and security conditions in Israel directly influence us. Since the
establishment of the State of Israel in 1948, Israel and its Arab neighbors have engaged
in a number of armed conflicts. A state of hostility, varying in degree and intensity, has
led to security and economic problems for Israel. Major hostilities between Israel and its
neighbors may hinder Israels international trade and lead to economic downturn.
This, in turn, could have a material adverse effect on our operations and business. There
has been an increase in unrest and terrorist activity in Israel, which began in September
2000 and which has continued with varying levels of severity through 2007. The future
effect of this deterioration and violence on the Israeli economy and our operations is
unclear. Recently, there was an escalation in violence among Israel, Hamas, the
Palestinian Authority and other groups, as well as extensive hostilities along
Israels northern border with Lebanon in the summer of 2006, and extensive
hostilities along Israels border with the Gaza Strip since June 2007 when the Hamas
effectively took control of the Gaza Strip, which have intensified since February 2008.

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. If a military conflict or war arises, these
individuals could be required to serve in the military for extended periods of time. 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.

# Fluctuations in the
exchange rate between the U.S. dollar and foreign currencies may affect ouroperating results.

A
significant portion of the cost of our Israeli operations, mainly personnel costs, is
incurred in NIS. Therefore, our NIS related costs, as expressed in U.S. dollars, are
influenced by the exchange rate between the U.S. dollar and the NIS. During 2007, the NIS
appreciated against the U.S. dollar, which resulted in a significant increase in the U.S.
dollar cost of our operations in Israel. Such trend has continued during the first three
months of 2008 with further appreciation of the NIS against the U.S. dollar. 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
cannot completely eliminate the effects of currency fluctuations. Thus, exchange rate
fluctuations resulting in a devaluation of the U.S. dollar compared to the NIS could have
a material adverse impact on our operating results and share price.

Tax benefits that are available to
us require us to meet several conditions and may be terminated or reduced in the future,
which would increase our future tax expenses.

Our
facilities in Israel have been granted Approved Enterprise status under the Law for the
Encouragement of Capital Investments, 1959, commonly referred to as the Investment Law.
The Investment Law provides that capital investments in a production facility (or other
eligible assets) may be designated as an Approved Enterprise. Until recently, the
designation required advance approval from the Investment Center of the Israel Ministry of
Industry, Trade and Labor. For these programs to be eligible for tax benefits, we must
meet certain conditions, relating principally to adherence to the approved programs and to
periodic reporting obligations. We believe that we are currently in compliance with these
requirements. However, if we fail to meet these requirements, we would be subject to
corporate tax in Israel at the regular statutory rate. We could also be required to refund
tax benefits, with interest and adjustments for inflation based on the Israeli consumer
price index.

13

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On
April 1, 2005 an amendment to the Investment Law came into effect, which revised the
criteria for investments qualified to receive tax benefits. An eligible investment program
under the amendment will qualify for benefits as a Privileged Enterprise (rather than the
previous terminology of Approved Enterprise). Among other things, the amendment provides
tax benefits to both local and foreign investors and simplifies the approval process. The
amendment does not apply to investment programs approved prior to December 31, 2004 and
applies to new investment programs only. Under the amendment, if we were to pay a dividend
out of the tax-exempt income generated by a Privileged Enterprise under the provisions of
the amended Investment Law during the tax exemption period, a portion of the income that
is equivalent to the amount distributed as dividends will be subject to corporate tax, and
we may be required to record deferred tax liability with respect to such tax-exempt
income. As of December 31, 2007, we did not generate income under the provisions of the
amended Investment Law.

The government grants we have
received for research and development expenditures limit our ability to transfer
technologies outside of Israel and require us to satisfy specified conditions. If we fail
to satisfy these conditions, we may be required to refund grants previously received
together with interest and penalties, and may be subject to criminal charges.

Since
April 2006, our research and development efforts have been financed, in part, through
grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade
and Labor, or OCS. We therefore must comply with the requirements of the Israeli Law for
the Encouragement of Industrial Research and Development, 1984 and related regulations, or
the Research Law. In recent years, the Government of Israel has accelerated the rate of
repayment of OCS grants and may further accelerate them in the future. In addition, if we
fail to comply with any of the requirements imposed by the OCS, such as change of control
notices and annual reporting requirements, we may be required to refund any grants
previously received together with interest and penalties, and a person who transferred
OCS-funded technology may be subject to criminal charges and up to three years
imprisonment.

Technology
developed by OCS funding may not be transferred and any transfer of technology generally
requires the approval of an OCS committee. A transfer, for the purpose of OCS rules, means
an actual sale of the technology, any exclusive license to develop, market, and
manufacture products resulting from the technology or any other transaction which in
essence constitutes a transfer of the technology and does not include the worldwide sale
of products that are based on technology developed with OCS funding. We may not receive
the required approvals should we wish to transfer this technology in the future. These
restrictions may impair our ability to sell our technology assets, and the restrictions
will continue to apply even after we have repaid the full amount of royalties payable for
the grants. In addition, the restrictions may impair our ability to consummate a merger or
similar transaction in which the surviving entity is not an Israeli company.

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. Furthermore, it may be difficult to assert U.S. securities
law claims in original actions instituted in Israel.

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
a 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. The Israeli Companies
Law also 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. There is little case law available to assist in understanding the
implications of these provisions that govern shareholder behavior.

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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:

| |  | discourage
potential acquisition proposals;
| | - | -------------------------------------------

| |  | delay
or prevent a change in control; and
| | - | -----------------------------------------

| |  | 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.

As a foreign private issuer whose
shares are listed on The NASDAQ Global Market, we may follow certain home country
corporate governance practices instead of certain NASDAQ requirements.

As
a foreign private issuer whose shares are listed on The NASDAQ Global Market, we are
permitted to follow certain home country corporate governance practices instead of certain
requirements of The NASDAQ Marketplace Rules. A foreign private issuer that elects to
follow a home country practice instead of such requirements, must submit to NASDAQ in
advance a written statement from an independent counsel in such issuers home country
certifying that the issuers practices are not prohibited by the home countrys
laws. In addition, a foreign private issuer must disclose in its annual reports filed with
the Securities and Exchange Commission or on its website each such requirement that it
does not follow and describe the home country practice followed by the issuer instead of
any such requirement. As a foreign private issuer listed on The NASDAQ Global Market, we
may follow home country practice with regard to, among other things, composition of the
board of directors, director nomination procedure, compensation of officers, and quorum at
shareholders meetings. In addition, we may follow our home country law, instead of
the NASDAQ Marketplace Rules, which require that we obtain shareholder approval for
certain dilutive events, such as for the establishment or amendment of certain equity
based compensation plans, an issuance that will result in a change of control of the
company, certain transactions other than a public offering involving issuances of a 20% or
more interest in the company and certain acquisitions of the stock or assets of another
company.

|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, manufacture and marketing of
solutions and Internet applications to improve the connectivity and performance of
corporate Local Area Networks, or LANs, and Wide Area Networks. In mid-1999, we decided to
cease the research and development of new switching products for LANs and instead, to
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 subsidiary
EZchip Technologies Ltd., or EZchip, in December 1999.

Our
business now consists exclusively of the business of our EZchip subsidiary, a company that
is engaged in the development and marketing of Ethernet network processors for networking
equipment. EZchip is a fabless semiconductor company that provides Ethernet network
processors. EZchip provides its customers with solutions that scale from 1-Gigabit to
100-Gigabit per second with a common architecture and software across all products.
EZchips network processors provide the flexibility and integration that enable
triple-play data, voice and video services in access, metro and edge systems that make up
the new Carrier Ethernet networks. We currently own approximately 99% of the outstanding
shares of EZchip and approximately 89% of EZchip on a fully diluted basis, taking into
account EZchip options and shares held by current and former employees. 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.

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|B. | BUSINESS
OVERVIEW
|-- | -----------------

# Industry Background

In
recent years there has been a significant increase in the bandwidth demands on
communications networks. These networks have experienced major upsurges in the volume,
variety and complexity of communications traffic. The growth in Internet usage is creating
strong demand for bandwidth, and an increasing proportion of todays communications
traffic consists of digital media. Carrier networks are also undergoing significant
changes and are migrating to packet-based Ethernet networks that deliver voice, video and
high-speed Internet access, or triple-play services on one converged network.
These trends require network equipment to comply with evolving market requirements and be
able to provide new services, better Quality of Service, or QoS, and support new protocols
and standards. We believe this makes them a target market for programmable network
processors, or NPUs.

Network
processors are programmable integrated circuits that combine the speed advantages of
fixed-function ASIC (Application Specific Integrated Circuits) chips with the
programmability 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, offer new services and extend the lifespan of their products.

Carrier
network equipment is the primary target for network processors, since the switches and
routers that make up these networks are more demanding in features and performance and are
less cost sensitive than enterprise networks. The carrier network usually consists of
three domains, although in some cases there is an overlap between these domains. The
access network aggregates traffic from individual businesses and residences. A metro area
network, or MAN, spans a metropolitan area, and interconnects the access networks. A wide
area network, or WAN, interconnects geographically distanced MANs. Metro Ethernet networks
worldwide are growing rapidly to deliver triple-play services on efficient and flexible
networks. The switches that build the metro Ethernet networks must meet evolving market
requirements to provide new services, to provide better quality of service and to support
new protocols, tasks for which programmable network processors are ideally suited. The
widespread of broadband access technologies to residences and businesses and the growing
demand for greater access bandwidth is producing changes in the carrier access market,
similar to the carrier metro market. Most significantly, carrier access networks are
transitioning to packet-based Ethernet technology that enables higher throughput, at lower
cost and uniform technology across both the access and metro networks.

There
are several product categories within the carrier network that represent the target market
for network processors. These products can be grouped into several segments:

| |  | Edge
routers and MSSW (Multi Service Switches) are usually used as MAN/WAN edge devices. BRAS
(Broadband Remote Access Switches) aggregate traffic from broadband access devices such
as DSLAMs (DSL Access Multiplexers) and cable modem termination systems. These products
are gradually merging and becoming indistinct.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Metro
switches and routers that build the MAN. Metro Ethernet switches focus on providing a
large number of high-speed Ethernet ports to enable migration from the older SONET to
newer Ethernet infrastructure. Some metro switches support EoS (Ethernet over SONET) and
ADM (Add Drop Multiplexer) functionality and are sometimes referred to as MSPP and MSTP
(Multi Service Provisioning/Transport Platform). Similar to the edge routers, the lines
separating between the various types of metro switches are blurring. The focus of new
metro switch designs is to enhance support of Ethernet in terms of new protocols, QoS
(Quality of Service) and number of ports per system
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Access
switches consist of IP DSLAMs (DSL Access Multiplexers), CMTS (Cable Modem Termination
Systems) , fiber access aggregation switches such as EPON (Ethernet Passive Optical
Network) and GPON (Gigabit Passive Optical Network) and backhaul switches that aggregate
wireless base stations traffic. The bandwidth requirements of these systems grow
hand-in-hand with end user traffic growth and the introduction of new voice and video
services.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
carriers are gradually migrating to Ethernet-based infrastructure the various classes of
equipment that make up the carrier network are migrating to Ethernet-centric platforms,
including Carrier Ethernet Switches and Routers, or CESR, and various Ethernet-based
access platforms. Vendors of CESR equipment are the main target customers for our network
processors.

Other
market segments, of lesser focus for EZchip, include data center appliances that perform
functions such as security, load balancing and traffic analysis WAN/MAN edge devices and
metro switches are typically configured in a modular, expandable, multi-slot chassis that
consists of several line cards with many network ports per line card. Access switches are
typically built in a stand-alone, fixed configuration, flat frame known as a pizza box.

# Market Trends

Carrier
network equipment can be designed to incorporate Application Specific Integrated Circuits,
or ASICs, which are non-programmable switching chips, Field Programmable Gate Arrays, or
FPGAs, high-speed network processors, or NPUs, or a combination of them. The challenge is
to provide an integrated solution that is both flexible and cost-effective. Most of the
existing solutions are inadequate and fraught with difficulties.

ASICs
are effective from a performance viewpoint, but their drawback is the inability to program
them. This makes them too inflexible for todays rapidly changing application
environment and they need to be redesigned to deal with changes in applications. Also,
ASICs do not provide the flexibility to implement evolving requirements to support new
features and network protocols.

FPGAs
are expensive devices and fail to provide the price points that effectively address
carrier network price targets.

High-speed
network processors typically strain current silicon technologies to provide maximum
programming flexibility and integration while maintaining high throughput.

Within
the market for NPUs, there are currently three main distinct classes:

| |  | Access
NPUs  typically with up to 1-2 Gigabit throughput and mostly used in access
equipment.
| | - | ----------------------------------------------------------------------------------------------

| |  | Mid-range
NPUs  typically with up to 2.5-Gigabit throughput and often used in multi-service
equipment, such as asynchronous transfer mode, or ATM, equipment.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | High-speed
NPUs  typically with 10-Gigabit or higher throughput and mostly used in metro
switches and edge routers.
| | - | --------------------------------------------------------------------------------------------------------------------

Because
of the 10-Gigabit or higher throughput they provide, high-speed NPUs are the most suitable
of these three classes for use in edge routers and metro switches. As these products are
built in a modular multi-slot chassis and as each chassis typically consists of 8-16 line
cards, with each line card consisting of 1-4 NPUs, 8-64 NPUs can be typically used for a
fully populated chassis. Of these products, metro switches and specifically Ethernet metro
switches are the fastest growing, as carriers worldwide are migrating from older TDM
SONET/SDH based networks to packet Ethernet based networks.

The
access switches are mostly served today by access NPUs. However as packet services
increase the per-user bandwidth requirements, these switches are gradually migrating to
support aggregate throughput of 10-Gigabit and more and consequently, represent another
market segment suitable for higher-speed NPUs.

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# Our Solution

We
design and produce network processors for high-speed networking equipment, integrating
several key functions into a single chip. 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. We are a fabless semiconductor company, which means that we do not have our
own semiconductor manufacturing plant but rather utilize outside fabrication facilities.

Our
network processors are single-chip solutions that enable our customers to design
high-density, multi-port line cards. They include processing and classification engines,
traffic managers (other than the NP-1 and NP-1c) and media access controllers, or MACs,
and as a result, reduce the number of complementary chips required. This high level of
integration benefits networking vendors by reducing the system price, complexity and
amount of space required on the board.

Earlier
generations of network processor solutions 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
reduced instruction set computer, or RISC, processors rather than specially designed
processors. EZchips advance over these earlier designs lies in its integration of
processing, classification and traffic management functions. This is accomplished in part
with patented elements and other proprietary information and consists among other things
EZchips Task Optimized Processing technology, through a combination of chip
architecture innovations and through innovative table lookup (search) algorithms. As a
result, systems designed using EZchips products offer equipment vendors the ability
to reduce chip count, power consumption and cost.

Our
first product, which was introduced in April 2002, was the NP-1, a merchant silicon
network processor that formed the core of 10-Gigabit networking equipment. The NP-1 is no
longer in use. Most of our customers now use the NP-1c or NP-2 for their EZchip-based
products.

The
NP-1c processor has been commercially available since December 2003. The NP-1c is an
improved and less expensive version of the NP-1 and uses a 0.13-micron chip manufacturing
process.

Our
NP-2 network processor has been commercially available since July 2005. 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, into a single
chip we offer customers an even more integrated and cost effective solution.

We
are continuing to develop highly integrated network processors with our next generation
network processors, NP-3, NP-4 and NPA. These network processors are based on the same
core technology used in the NP-1, NP-1c and NP-2 with additional features. See
Future Products below.

The
architecture and features of these EZchip products offer the flexibility, scalability and
price performance that are sought by communications equipment vendors. All our network
processors are software-compatible to a great extent, making it possible for customers to
easily port their network-processor applications among our product families.

# Products

Network Processor Chips

EZchips
first product, the NP-1, was released in April 2002. The NP-1 was a single-chip,
full-duplex, 10-Gigabit, seven-layer network processor with integrated classifiers. It
provided fully programmable packet classification, modification and forwarding. The NP-1
was replaced by NP-1c.

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 network processor that integrates search engines, yet it offers a significant
increase in performance and cost reduction due to its improved process technology. NP-1c
is essentially an improved and less expensive version of the NP-1 that uses a 0.13-micron
chip manufacturing process and, therefore, we no longer offer the NP-1.

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The
NP-2, introduced in July 2005, is, like its predecessor, the NP-1c, a single-chip,
full-duplex, 10-Gigabit network processor. However, in addition to the integration of
packet processing, classification search engines and MACs provided in the NP-1c, the NP-2
also includes traffic managers for improved QoS. Since the traffic management function is
generally performed by complementary chips, by integrating it directly into the network
processor we offer our customers a cost-effective network processing solution that reduces
power dissipation and system design costs. The NP-2 network processor is available in
three models for different speeds and feature sets, which enables the NP-2 to position
itself in network processor market segments not reached by the NP-1 and NP-1c.

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 addresses line card applications, which
often have eight or more cards installed per chassis, and stand-alone pizza
box applications.

Since
all the NP-2 models are software compatible and share the same pin arrangement, 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 also software-compatible with the
NP-1c, making it possible for existing customers to port their network-processor
applications to NP-2.

Evaluation Boards and
Network-processor Based Systems

Evaluation
systems are usually required by customers to enable them to test their NPU-based systems.
Evaluation systems for the NP-1c and NP-2 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 our
network processor. These systems serve as evaluation systems for our current and
prospective customers, as well as systems that our customers may adapt and differentiate
and then market as their own products. The systems we provide use the same hardware and
software environments and are different in their form factor:

| |  | EZ-ATCA
follows the new Advanced Telecommunications Computing Architecture, or AdvancedTCA®,
and is provided as a blade that can be plugged into an AdvancedTCA chassis or as a
stand-alone, self-contained box. AdvancedTCA is the PCI Industrial Computer Manufacturers
Group, or PICMG, specification for Advanced Telecommunications Computing Architecture and
forms the basis for standard-compliant hardware for next generation telecommunications
equipment.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | EZsystem
is a stand-alone, self-contained box.
| | - | ----------------------------------------------

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.

The
EZdesign toolkit 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 compiler, debugger and
other utilities. 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 central processing
unit, or 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.

19

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To
assist our customers in their application development, EZchip also provides customers with
a broad library featuring source code for a wide range of applications. These include
Metro Ethernet protocols, MPLS (Multi-Protocol Label Switching), IPv4 and IPv6 routing,
ACL (Access Control Lists), Network Address Translation and Server Load Balancing. New
code is periodically added to this library.

# Future Products

EZchip
is continuing to develop highly integrated network processors with its next generation
network processors, NP-3 and NP-4. These network processors are based on our core
technology used in the NP-1, NP-1c and NP-2 with the addition of higher throughput, new
interfaces and more features.

The
NP-3 offers a significant increase in throughput compared to NP-2 due to its 90nm process
technology and enhanced algorithms. It also features various enhancements that apply to
carrier Ethernet packet processing and traffic management.

The
NP-4 continues with our distinctive high level integration of functionality into the
network processor. NP-4 offers higher throughput than NP-3, and targets 20-Gigabit
,40-Gigabit and 100-Gigabit line-card and pizza box carrier Ethernet applications. In
addition to its integrated classifiers and traffic managers, the NP-4 is designed to
include Ethernet physical layer transceivers, or PHYs, and for some applications
eliminates the need for a separate fabric interface chip. Integration of these functions,
normally performed by separate chips, will further save our customers valuable space on
their cards while reducing system costs and complexity.

The
NP-3 and NP-4 are currently under development and are scheduled to be available in 2008
and 2009, respectively.

In
addition, in October 2006, we announced a partnership with Marvell Technology Group Ltd.,
or Marvell, to develop, market and sell next generation network processor unit solutions.
The result of this partnership is a special version of the NP-3 that was jointly developed
with Marvell for the worlds largest network equipment vendor that selected this
special NP-3 version for several of its platforms. This NPU is being sampled with
production expected during 2008.

In
October 2007 we announced that we are developing a new family of network processors
targeting Ethernet Access applications. Several models of the network processors, named
NPA, will be offered with combinations of 100-Megabit, 1-Gigabit and 10-Gigabit Ethernet
ports with an aggregate throughput of up to 10-Gigabits. This family of access NPUs is
based on technology we have developed for our high-speed NPUs and offers many of their
features that are becoming required for building Ethernet access switching systems. The
NPA is currently under development and is scheduled to sample during 2008.

With
the addition of the NPA family of access NPUs, EZchip will be able to offer customers a
broad range of NPUs ranging in throughput from a few Gigabit to 100 Gigabit with similar
architecture and software that can be ported to multiple product lines.

# 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.

Our
NPUs integrate many high-speed TOPs (Task Optimized Processors), each specifically
designed and optimized to perform a specific task. Four types of TOPs  parse,
search, resolve and modify  are employed in our NPUs to perform the main tasks of
packet processing, which are classification, forwarding and modification. Each TOP
processor type employs a unique architecture with a customized, function-specific data
path and instruction set. This minimizes the number of clock cycles required for complex
packet manipulation and provides exceptionally fast packet processing. TOP performance is
boosted by a super-scalar architecture in which multiple instances of the TOPs operate in
parallel within each pipeline stage.

20

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Our
NPUs feature embedded search engines (TOPsearch) that perform table lookups needed for
implementing diverse applications. These search engines implement proprietary and patented
lookup algorithms that utilize DRAM (dynamic random access memory) chips for storing the
lookup tables and reduce the need for more expensive CAM (content addressable memory) and
SRAM (static random access memory) chips.

Other
than the NP-1 and NP-1c, all of our network processors also incorporate integrated traffic
managers for advanced QoS, which is required by increasingly complex networks. After
modification, packets are put in queues that are managed and controlled by one of two
traffic managers, which provide traffic management capabilities on both the ingress and
egress paths. By integrating this functionality into our network processors, EZchip
eliminates the need for our customers to employ a separate traffic management chip.

We
consider the processing flexibility and the ability to implement and integrate the main
network processing features into a single chip as one of the primary advantages of our
technology. We intend to continue to provide this high level of integration in future
products under development.

# Research and Product
Development

Currently,
84 employees, representing about 75% of our 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. Our net
research and development expenses were approximately $8.2 million in 2005, $8.4 million in
2006 and $8.5 million in 2007. Since April 2006, EZchips research and development
efforts have been financed, in part, through grants from the Office of the Chief Scientist
of the Israeli Ministry of Industry, Trade and Labor, or the OCS. EZchips 2006 and
2007 research and development expenses are net of OCS grants in the amount of
approximately $1.0 million and $2.1 million, respectively.

# Sales and Marketing

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

In
general, it takes a customer 18 to 24 months to design and bring to market 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 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. We have no direct influence upon
the sales and marketing of our customers products.

Since
we expect the 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 target designers, manufacturers and vendors of networking equipment and other
large-scale data processing network devices, such as switches and routers.

21

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To
facilitate marketing efforts, we have built on our extensive industry exposure through
trade shows and similar events and has established sales and support offices in California
and Massachusetts, as well as local support in China. Currently, our sales and marketing
and support staff consists of 14 professionals and administrative personnel. This sales
force consists of persons with technical training and significant experience in the
semiconductor industry. Sales efforts are augmented by the direct involvement of our
senior executives, who work closely with customers to determine product needs. In some
parts 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:

| |  | seminar
programs, trade shows, guest speaker invitations and technical conferences;
| | - | -----------------------------------------------------------------------------------

| |  | public
relations activities and customer events;
| | - | ------------------------------------------------

| |  | technical
articles in industry publications and marketing collateral materials; and
| | - | -----------------------------------------------------------------------------------

| |  | communication
on the Internet.
| | - | ------------------------------

We
also work with leading vendors of complementary technologies to provide our customers with
fully interoperable solutions. We provide interoperability with devices from numerous
semiconductor companies, including AMCC, Broadcom, Cortina, Dune Networks, Enigma
Semiconductor, Marvell, PMC-Sierra and Vitesse.

# Customers and Customer
Support

As
of December 31, 2007, we had approximately 127 design wins with customers worldwide, who
purchased development kits and started designs of networking products based on our network
processors. Of such design wins, 61 are already in production (40 NP-2 and 21 NP-1c) and
we expect a significant portion of the remaining design wins to enter production during
2008 and 2009. We do not expect that all of our design wins will reach production stage,
as projects may be halted, delayed or cancelled. In addition, there is no assurance that
products that have reached production will be successfully accepted in the marketplace.

Two
major tier-1 CESR vendors are building several of their CESR platforms based on EZchip
network processors:

| |  | Juniper
Networks, which accounted for approximately 42% of our 2007 revenues, already entered
production with NP-2 based products and we expect Juniper Networks to continue to launch
additional NP-2 and NP-3 based products during 2008, which launches should result in
Juniper Networks maintaining and continuing to increase their contribution to our
revenues.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
other major customer, which is considered to be the worlds leading networking
equipment vendor, is currently in development with products based on our special NP-3
version, which was developed in collaboration with Marvell.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Potential
customers typically evaluate our network processor, as well of those offered by our
competitors, for several months before selecting the one best suited to their project.
Once our product is selected, the customer usually purchases the software tools and
evaluation hardware and allocates the personnel to begin working on the project. Only when
the customer has allocated both the financial and human resources, and we fully believe
that there is every intention for the project to move forward, do we consider it a
design win.

Since
some of our larger customers have teams working on several projects, we may have more than
one design win with that customer. In this case, the customer would purchase only one set
of software tools.

Customer
support is provided from our Israeli headquarters and two offices in the United States and
by local support in China. The primary business center in the United States is located on
the West Coast in the Silicon Valley area and a Boston-area office services the Eastern
United States and Europe. A representative in China supports our Chinese customers.

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

22

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# 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 intense. There are currently four vendors
providing high-speed network processors that target the metro and access switches, and
edge routers: EZchip, Sandburst Corporation (which was acquired by Broadcom Corporation in
January 2006), Bay Microsystems and Xelerated, Inc. In addition, Broadcom Corporation and
Marvell Technology Group Ltd. have released switch ASICs (non-programmable chips) that
target these market segments as well. Agere Systems Inc., Intel Corporation and Wintegra
Inc. are focused on lower speed applications. Our NPA access NPUs compete with NPUs from
these lower speed NPU vendors. Some customers use FPGAs (Field Programmable Gate Arrays),
mainly from Altera Corporation and Xilinx Inc. to implement packet processing functions
and these may be competing solutions as well. We also compete with customers who choose to
develop their own network processors or in-house ASIC solutions.

Some
of our competitors or potential competitors are larger, have significantly greater sales,
have greater financial resources and are better known.

We
believe that the principal elements of competition in the market for advanced network
processors are integration, flexibility and price. Integration reduces the 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) and ultimately the overall price of a system solution.
Flexibility implies ability to address changing market processing requirements through
programming and downloading of new code to the network processor.

Our
research and development efforts seek to maximize integration and programming flexibility
while minimizing production costs. Our ability to compete in this emerging market depends
largely upon our ability to offer better design and performance than our competitors.

Most
of our network processor competitors currently-announced products use separate chips
for traffic management or provide lesser flexibility or throughput. Traffic managers are
typically separate chips, placed alongside the network processor on the board, which
enable the control of the flow of traffic and implementation of QoS features.

Some
of our competitors offer a 20-Gigabit full-duplex network processor, but we believe that
our network processors provide greater programming flexibility. When compared to the
non-programmable ASIC solutions, we believe that our network processors bring flexibility
that addresses customers needs to support new applications, especially in carrier
switches and routers, at a reasonable price differential when compared to the price of
ASIC solutions.

While
we believe that our network processors 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 patents, trademarks, trade secret laws, confidentiality
procedures and licensing arrangements to protect our intellectual property rights, 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.

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

# 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.

Our
NP-1c network processors utilize IBMs 0.11-micron Cu-11 ASIC template. IBM will also
manufacture our NP-3 line of products using the 90 nanometer process. Taiwan Semiconductor
Manufacturing Co. (TSMC) manufactures our NP-2 line of products using the 0.13 micron
process and the special version of our NP-3 NPU, which we developed with Marvell, and will
manufacture our NPA line of products, using 90 nanometer. We work with TSMC through third
parties that coordinate and assume responsibility for the manufacturing 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.

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.

|C. | ORGANIZATIONAL
STRUCTURE
|-- | ------------------------

We
are organized under the laws of the State of Israel. We have two subsidiaries. EZchip
Technologies Ltd., a corporation organized under the laws of the State of Israel, and
EZchip Inc., a corporation incorporated under the laws of the State of Delaware. We
currently own approximately 99% of the outstanding shares of EZchip Technologies Ltd. and
approximately 89% on a fully diluted basis, taking into account EZchip options and shares
held by current and former employees. EZchip Inc. is wholly owned by EZchip Technologies
Ltd.

|D. | PROPERTY,
PLANTS AND EQUIPMENT
|-- | ------------------------------

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, at an
aggregate rental cost of approximately $340,000 in 2007. The lease for our principal
offices expires in January 2009.

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. The
aggregate rental cost for the two offices was approximately $80,000 in 2007.

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 $217,000 in 2005,
$231,000 in 2006 and $309,000 in 2007. Our capital expenditures in 2005, 2006 and 2007
were spent primarily for the procurement of research and development hardware equipment
and software tools.

24

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|ITEM 4A. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

Not applicable.

|ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- | --------------------------------------------

|A. | OPERATING
RESULTS
|-- | -----------------

The
following discussion of our results of operations should be read together with our
consolidated financial statements and the related notes, which appear elsewhere in this
Annual Report. The following discussion contains forward-looking statements that reflect
our current plans, estimates and beliefs and involve risks and uncertainties. Our actual
results may differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include those discussed below
and elsewhere in this Annual Report.

# General

We
design, develop, manufacture, market and support network processors, through our
subsidiary, EZchip. Since mid-1999, we have focused our efforts on the network processor
market and ceased our investment in research and development for LAN switching products.
We also closed the operations of our Internet applications business segment, principally
comprised of the operations of NetGuard (in 1998) and NetXchange (early 2001). 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. Our sales have increased in the last few
fiscal years as EZchip has begun to generate revenues.

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 U.S. 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
research and development 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,
or 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 U.S. 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.

# Critical Accounting
Policies

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 our revenues mainly from sales of network processor chips and to a lesser extent
from the sales of network-processor based systems, software tools and maintenance and
support services.

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In
general, it takes 18 to 24 months to design a networking product based on EZchip network
processors. During this design phase the revenues we recognize are mostly attributable to
the sale of evaluation systems and development software tools, which our customers use to
assist in the 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.

Revenues
from network processor chips and network processor-based systems are recognized upon
shipment in accordance with Staff Accounting Bulletin No. 104 Revenue Recognition
in Financial Statements, 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 its customers. In addition, if a sale does not meet all of
the criteria, the sale is deferred until all criteria are met.

Revenues
from sales of software tools and maintenance services which are sold separately from other
products are recognized in accordance with statement of Position 97-2, Software
Revenues Recognition. We use the residual method when vendor
specific objective evidence (VSOE) of fair value only exists for the maintenance.

In
certain instances, we sell network processor-based systems together with software tools
and maintenance and support services. In these cases, we comply with the requirements set
forth in EITF 00-21, Revenue Arrangements with Multiple Deliverables,
relating to the separation of multiple deliverables into individual accounting units with
determinable fair values.

# 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. Once inventory is written down, a
new cost basis is established for future periods.

# Legal Contingencies

When
the likelihood of the incurrence of losses related to our legal proceedings is probable
and management has the ability to estimate such costs, we provide for estimates of
probable losses through charges to our Consolidated Statements of Operations. These
estimates have been based on our assessment of the facts and circumstances at each balance
sheet date and are subject to change based upon new information and intervening events.

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.

# 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. The allowance for doubtful debts amounted to
$40,000 and $48,000 as of December 31, 2007 and 2006, respectively.

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# Goodwill and Other
Intangible Assets

We
follow Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and
Other Intangible Assets, or SFAS No. 142. Under SFAS No. 142, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized but are subject
to periodic impairment tests in accordance with the Statement. Goodwill impairment is
deemed to exist if the net book value of a reporting unit exceeds its estimated fair
value. The total purchase price of business acquisitions accounted for using the purchase
method is allocated first to identifiable assets and liabilities based on estimated fair
values. The excess of the purchase price over the fair value of net assets of purchased
businesses is recorded as goodwill.

We
perform an annual impairment test during the fourth quarter of each fiscal year, or more
frequently if impairment indicators are present. We operate in one operating segment, and
this segment comprises our only reporting unit. As of December 31, 2007, 2006 and 2005 no
impairment charges were required.

# Equity-based
Compensation Expense

We
account for equity-based compensation in accordance with SFAS No. 123(R),
Share-Based Payment. Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the grant date based on the fair
value of the award and is recognized as an expense over the requisite service periods.
Determining the fair value of stock-based awards at the grant date requires the exercise
of judgment, including the amount of stock-based awards that are expected to be forfeited.
If actual results differ from these estimates, equity-based compensation expense and our
results of operations could be impacted.

Prior
to the adoption of SFAS No. 123(R), we accounted for equity-based awards to employees and
directors using the intrinsic value method in accordance with APB No. 25 as allowed under
SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123.
Pursuant to these accounting standards, we recorded deferred compensation for stock
options granted to employees at the date of grant equal to the excess of the market value
of the underlying shares at that date over the exercise price of the options.  Furthermore,
when terms of options granted were modified, we accounted for the modifications as an
exchange of the original award, resulting in additional compensation expenses based on the
differences between the fair value of the new award and the original award immediately
before modification and in accordance with SFAS No 123.

We
estimate the fair value of employee stock options using a Black-Scholes Merton valuation
model. The fair value of an award is affected by our stock price on the date of grant as
well as other assumptions including the estimated volatility of our stock price over the
term of the awards and the estimated period of time that we expect employees to hold their
stock options. The risk-free interest rate is based on the yield from U.S. Federal Reserve
zero-coupon bonds with an equivalent term. We use the historical volatility of our
publicly traded stock options in order to estimate future stock price trends. The expected
term of options granted is calculated in accordance with the provisions of Staff
Accounting Bulletin, or SAB, 107. Under the simplified method, the expected
term is calculated as the midpoint between the vesting date and the end of the contractual
term of the option.

With
regard to the fair value of employee stock options in EZchip, we retained a third party
appraiser to calculate the fair market value of the ordinary shares fair value and
other assumptions used in the Black-Scholes Merton valuation model.

# Accounting for Income Tax

On
January 1, 2007, we adopted the Financial Accounting Standards Board, or FASB,
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109, or FIN 48,which contains a
two-step approach to recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS No. 109, Accounting for Income Taxes. The first
step is to evaluate the tax position taken or expected to be taken in a tax return by
determining if the weight of available evidence indicates that it is more likely than not
that, on an evaluation of the technical merits, the tax position will be sustained on
audit, including resolution of any related appeals or litigation processes. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely to
be realized upon ultimate settlement. Prior to January 1, 2007, we estimated our
uncertain income tax obligations in accordance with SFAS No. 109 and SFAS No. 5
Accounting for Contingencies, or SFAS No. 5. As a result of the
adoption of the FIN 48 we recorded a cumulative impact in the amount of $222,000.

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We
also have non-income tax obligations related to sales and use and employment-related taxes
related to these tax matters that are outside the scope of FIN 48 and accounted for under
SFAS No. 5.

Accounting
for tax positions requires judgments, including estimating reserves for potential
uncertainties. We also assess our ability to utilize tax attributes, including those in
the form of carry forwards, for which the benefits have already been reflected in the
financial statements. We do not record valuation allowances for deferred tax assets that
we believe are more likely than not to be realized in future periods. While we believe the
resulting tax balances as of December 31, 2007 and 2006 are appropriately accounted
for in accordance with FIN 48, SFAS No. 5 and SFAS No. 109 as applicable, the
ultimate outcome of such matters could result in favorable or unfavorable adjustments to
our consolidated financial statements and such adjustments could be material. See Note 16
to consolidated financial statements for further information regarding income taxes. We
are in the process of filing local and foreign tax returns that are subject to audit by
the respective tax authorities. Our tax returns are subject to ongoing audits by the tax
authorities, which often result in proposed assessments. Our estimate of the potential
outcome for any uncertain tax issue is highly judgmental. We believe that we adequately
provided for any reasonably foreseeable outcomes related to tax audits and settlement.
However, our future results may include favorable or unfavorable adjustments to our
estimated tax liabilities in the period the assessments are made or resolved, audits are
closed or when statutes of limitation on potential assessments expire.

# Results of Operations

The
following table presents, for the periods indicated, information concerning our results of
operations.

| |                                                          | Year Ended December 31,
| | -------------------------------------------------------- | -----------------------
|
|
|
|
| | Revenues                                                 |                        
| | Costs of revenues                                        |                        
| | Amortization of technology                               |                        
| |                                                          |                        
| | Gross profit                                             |                        
| | Operating expenses:                                      |                        
| | Research and development, net                            |                        
| | In-process research and development charge               |                        
| | Sales, general and administrative, net                   |                        
| |                                                          |                        
| | Total operating expenses                                 |                        
| |                                                          |                        
| | Operating loss                                           |                        
| | Financial and other income (expenses), net               |                        
| |                                                          |                        
| | Loss from continuing operations before minority interest |                        
| | Minority interest in loss of a subsidiary                |                        
| |                                                          |                        
| | Net loss basic and diluted                               |                        
| | Cumulative effect of change in accounting principle      |                        
| | Net loss after cumulative effect of change in accounting |                        
| | principle                                                |                        
| |                                                          |                        
| | Net loss per share (basic and diluted)                   |                        
| | Net loss per share after cumulative effect of change in  |                        
| | accounting principle                                     |                        

# Year Ended December 31,
2007 Compared with Year Ended December 31, 2006

Revenues

We
generate our revenues mainly from sales of network processors chips and to a lesser extent
from the sales of network processor-based systems, software tools and services. For the
year ended December 31, 2007, revenues increased by $11.0 million, or 130%, to $19.5
million from $8.5 million in the year ended December 31, 2006. This increase is mainly
attributable to increased purchases by a few NP-2 customers that entered into their
production stage for networking products incorporating our network processors chips.

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Cost of Revenues

Cost
of revenues consists primarily of the cost of network processor chips purchased from our
contract manufacturers and to a lesser extent from the cost of network processor-based
systems, labor costs and other supply chain management and facilities related costs. For
the year ended December 31, 2007, our cost of revenues increased by $4.4 million, or 119%,
to $8.0 million (41% of revenues) from $3.7 million (43% of revenues) in the year ended
December 31, 2006, primarily as a result of the increase in revenues. The decrease in cost
of revenues as a percentage of revenues is the result of the increased volume production
orders from our contract manufactures, characterized by lower unit prices.

Amortization of Technology

Amortization
of technology reflects the amortized cost of the intangible asset -existing
technology created in connection with the purchases of EZchip shares in the share
exchange transactions. Each of the EZchip share acquisitions was accounted for according
to the purchase method of accounting, in accordance with SFAS No. 141, and accordingly,
the respective purchase price was allocated to the assets acquired and liabilities assumed
based upon their estimated fair values at the respective dates of acquisition. Existing
technology is amortized using the straight-line method over its useful life, which is up
to four years. For the year ended December 31, 2007, amortization of technology increased
by $0.8 million, or 236%, to $1.2 million from $0.4 million in the year ended December 31,
2006. This increase resulted mainly from the December 22, 2006 exchange transaction which
increased the existing technology asset in our balance sheet by $2.8 million and hence
resulted in increased amortization cost during 2007.

Gross Profit

For
the year ended December 31, 2007, gross profit increased by $5.8 million, or 131%, to
$10.2 million (53% of revenues) from $4.4 million (52% of revenues) in the year ended
December 31, 2006, primarily as a result of the increase in revenues.

Research and Development
Expenses, Net

Research
and development expenses consist primarily of the salary and benefits of engineers and
costs related to external engineering design services (non-recurring engineering costs).
The reported figures consist entirely of EZchips research and development costs.
Since April 1, 2006, we have received research and development participation grants from
the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of Israel,
or the OCS. For the year ended December 31, 2007, research and development costs increased
by $1.2 million, or 13%, to $10.7 million (excluding OCS grants of $2.1 million) from $9.4
million (excluding OCS grants of $1.0 million) in the year ended December 31, 2006. This
increase is attributable primarily to higher labor costs in the 2007 period, resulting
from an increase in the number of our research and development personnel (from 72 persons
at the end of 2006 to 81 persons at the end of 2007), combined with an increase in the
average labor cost per employee and a higher level of equity based compensation under FAS
123R, which were partially offset by significantly lower non-recurring engineering costs
in 2007 compared to 2006.

In-Process Research and
Development Charge

We
recorded in-process research and development charges in the amounts of $0.4 million in the
year ended December 31, 2007 and $2.0 million in the year ended December 31, 2006 in
connection with the purchases of EZchip shares in September 2007 and December 2006,
respectively. See Notes 3h and 3i to the consolidated financial statements.

Sales, General and
Administrative Expenses

Sales,
general and administrative expenses consist primarily of salaries, commissions to third
party sales representatives, participation in trade shows and travel expenses as well as
legal, accounting and other administrative costs. For the year ended December 31, 2007,
these expenses increased by $1.6 million, or 38%, to $5.9 million from $4.3 million in the
year ended December 31, 2006. This increase is attributable primarily to equity-based
compensation expense recorded under SFAS No. 123(R) and to a lesser extent to labor costs
(resulted from the increase in personnel as well as to an increase in the average labor
cost per employee), marketing expenses, sales commissions, legal, accounting and other
administrative costs associated mainly with the growth of our business.

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Financial and Other
Income (Expenses), Net

Financial
and other income (expenses), net reflects the income or expenses both from traditional
investment income or financing expenses and from exchange rate fluctuations and currency
translation. For the year ended December 31, 2007, net financial income increased by $2.3
million, or 103%, to $71,000 from net financial expenses of $2.2 million for the year
ended December 31, 2006. This increase is primarily attributable to the accretion of $2.7
million to the redemption value of the EZchip Redeemable Preferred Shares in 2006. In
December 2006, we acquired additional preferred shares of EZchip resulting in our owning
the majority of the EZchip Series C Redeemable Preferred Shares. As a result, a redemption
demand cannot be delivered without our consent and we therefore ceased to record any
interest expense in our consolidated financial statements. As of January 22, 2008, we own
all of EZchips outstanding Redeemable Preferred Shares (see Note 19 to the
consolidated financial statements).

Minority Interest in Loss
of a Subsidiary

Minority
interest in loss of a subsidiary reflects the share of EZchips minority holders of
ordinary shares in EZchips loss. The amounts of $0.4 million and $0.2 million
represent proceeds received during 2007 and 2006, respectively, from the exercise of
options to purchase ordinary shares of EZchip.

Cumulative Effect of
Change in Accounting Principle

We
did not record any cumulative effect of change in accounting principle in 2006 and 2007.

# Year Ended December 31,
2006 Compared with Year Ended December 31, 2005

Revenues

For
the year ended December 31, 2006, revenues increased by $2.6 million, or 45%, to $8.5
million from $5.8 million in the year ended December 31, 2005. This increase is mainly
attributable to increased purchases by a few NP-2 customers that entered into their
production stage for networking products incorporating our network processors chips.

Cost of Revenues

For
the year ended December 31, 2006, our cost of revenues increased by $1.3 million, or 56%,
to $3.7 million (43% of revenues) from $2.4 million (40% of revenues) in the year ended
December 31, 2005, primarily as a 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 2005.

Gross Profit

For
the year ended December 31, 2006, gross profit increased by $1.2 million, or 39%, to $4.4
million (52% of revenues) from $3.2 million (55% of revenues) in the year ended December
31, 2005, primarily as a result of the increase in revenues.

Research and Development
Expenses, Net

For
the year ended December 31, 2006, research and development costs (excluding OCS grants of
$1.0 million) increased by $1.2 million, or 14%, to $9.4 million from $8.2 million in the
year ended December 31, 2005. This increase is attributable primarily to labor costs and
equipment and software tool licenses costs associated with the increase in the number of
EZchips research and development personnel. In addition, research and development
expenses for the year ended December 31, 2006 included $0.4 million of stock-based
compensation expense recorded under SFAS No. 123(R).

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In-Process Research and
Development Charge

We
recorded in-process research and development charges in the amounts of $2.0 million in the
year ended December 31, 2006 and $1.5 million in the year ended December 31, 2005 in
connection with the purchases of EZchip shares in exchange transactions in December 2006
and June 2005, respectively. See Notes 3g and 3h to the consolidated financial statements.

Sales, General and
Administrative Expenses

For
the year ended December 31, 2006, sales, general and administrative expenses increased by
$0.7 million, or 18%, to $4.3 million from $3.6 million in the year ended December 31,
2005. This increase is attributable primarily to labor costs resulted mainly from the
increase in the number of sales, general and administrative personnel. In addition, sales,
general and administrative expenses for the year ended December 31, 2006 included $0.2
million of stock-based compensation expense recorded under SFAS No. 123(R).

Financial and Other
Expenses, Net

For
the year ended December 31, 2006, net financial expenses increased by $1.9 million, or
606%, to $2.2 million from net financial expenses of $0.3 million for the year ended
December 31, 2005. This increase is primarily attributable to the accretion to redemption
value of the EZchip Redeemable Preferred Shares in 2006. The EZchip Series C Redeemable
Preferred Shares were issued in March 2003, March 2004 and July 2005, and we recorded the
amounts of $10.9 million, $2.6 million and $3.0 million, which were invested by parties
other than us in March 2003, March 2004 and July 2005, respectively, as Redeemable
Preferred Shares in EZchip. The EZchip Series C Redeemable Preferred Shares may be
redeemed at the request of the majority holders of such shares, after March 2007 (four
years from the original issuance date), at a price per share equal to the greater of (a)
the original per share issue price plus an amount equal to any accrued and unpaid
dividends thereon plus 6% interest compounded annually or (b) the fair market value of
such shares. In December 2006, we acquired preferred shares of EZchip in consideration for
the issuance of our ordinary shares resulting in us owning a majority of the EZchip Series
C Redeemable Preferred Shares. See Note 3h to the consolidated financial statements. As a
result, a redemption demand cannot be delivered without our consent and we do not expect
that we will be required to record any interest expense in the future related to such
Redeemable Preferred Shares in our consolidated financial statements.

Minority Interest in Loss
of a Subsidiary

Minority
interest in loss of a subsidiary reflects the share of EZchips minority holders of
ordinary shares in EZchips loss. The amounts of $0.2 million and $0.2 million
represent proceeds received during 2006 and 2005, respectively, from the exercise of
options to purchase ordinary shares of EZchip.

Cumulative Effect of
Change in Accounting Principle

In
April 2003, EZchip granted a warrant to purchase Series C Redeemable Preferred C Shares in
connection with a loan agreement with a third party. The loan was repaid in August 2004.
EZchip accounted for such warrant in accordance with FASB Statement No. 150
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, or SFAS No. 150. Under SFAS No. 150, this warrant was
classified as a liability and is carried at its fair value. The guidance of this Statement
was applied in the first interim period beginning after June 30, 2005 and resulted in a
cumulative affect of a change in accounting principles of $0.1 million. See Note 2k of the
consolidated financial statements.

Effective Corporate Tax
Rate

Israeli
companies were subject to corporate tax at the rate of 29% of their taxable income in
2007. The corporate tax rate was reduced to 27% in 2008, and will be further reduced to
26% in 2009 and 25% in 2010. 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 is valid for ten years following the first year in which the company generated
net income associated with the approved enterprise. 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.

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We
and EZchip have tax loss carryforwards resulting from the years up to and including 2007
amounting to approximately $76 million 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 2007 amounting to approximately $3.7 million.

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 $25 million.

We
and our subsidiaries have a history of losses and therefore provided valuation allowances
in respect of deferred tax assets resulting from operating loss carryforward and other
temporary differences.

Adoption of New
Accounting Standard

On
January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109,
or FIN 48. See discussion above under Critical Accounting Policies.

Our Location in Israel

We
are incorporated under the laws of the State of Israel, and our principal executive
offices and principal research and development facilities are located in Israel. See Item
3D Key Information  Risk Factors  Risks Relating to Our Operations in
Israel for a description of governmental, economic, fiscal, monetary or political
polices or factors that have materially affected or could materially affect our
operations.

Impact of Currency
Fluctuation and of Inflation

A
significant portion of the cost of our Israeli operations, mainly personnel costs, is
incurred in NIS. Therefore, our NIS related costs, as expressed in U.S. dollars, are
influenced by the exchange rate between the U.S. dollar and the NIS. During 2007, the NIS
appreciated against the U.S. dollar, which resulted in a significant increase in the U.S.
dollar cost of our operations in Israel. Such trend continued during the first three
months of 2008 with the NIS further appreciated against the U.S. dollar. Also, 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
cannot eliminate the effects of currency fluctuations. Thus, exchange rate fluctuations
resulting in a devaluation of the U.S. dollar compared to the NIS could have a material
adverse impact on our operating results and share price. The caption Financial and
other income (expenses), net in our consolidated financial statements includes the
impact of these factors as well as traditional interest income or expense. See Note 18 to
our consolidated financial statements.

Seasonality

Our
operating results are generally not characterized by a seasonal pattern.

Recently Issued
Accounting Standards

Based
on our review of the recently issued accounting standards, we believe that the adoption of
the following standard may have a significant impact on our consolidated financial
statements:

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In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
or SFAS 157, which defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. SFAS 157 applies to other
accounting pronouncements that require or permit fair value measurements and, accordingly,
does not require any new fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007 for financial assets and liabilities, as well as for any
other assets and liabilities that are carried at fair value on a recurring basis, and
should be applied prospectively. The adoption of the provisions of SFAS 157 related to
financial assets and liabilities and other assets and liabilities that are carried at fair
value on a recurring basis is not anticipated to materially impact our consolidated
financial position and results of operations. Subsequently, the FASB provided for a
one-year deferral of the provisions of SFAS 157 for non-financial assets and liabilities
that are recognized or disclosed at fair value in the consolidated financial statements on
a non-recurring basis. We are currently evaluating the impact of adopting the provisions
of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed on a
non-recurring basis.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, or SFAS No. 159. SFAS No. 159 permits
companies to choose to measure certain financial instruments and certain other items at
fair value. The standard requires that unrealized gains and losses on items for which the
fair value option has been elected be reported in earnings. The provisions of
SFAS No. 159 are effective for financial statement issued for fiscal years
beginning on January 1, 2008. We have determined that the adoption of SFAS 159 will
not have an impact on our consolidated financial statements since we have not elected the
fair value option for any of our existing assets or liabilities as of FAS 159 effective
date.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations, or SFAS 141R. SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non controlling interest in the
acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after
December 15, 2008. Earlier adoption is prohibited. SFAS 141R will have an impact on
accounting for future business combinations once adopted and not on prior acquisitions. As
such the adoption of the provisions of FAS 141R is not expected to impact our consolidated
financial statements.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51, or SFAS No.
160. SFAS No. 160 establishes accounting and reporting standards that require that
the ownership interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parents equity; the amount of consolidated net
income attributable to the parent and to the noncontrolling interest be clearly identified
and presented on the face of the consolidated statement of income; and changes in a
parents ownership interest while the parent retains its controlling financial
interest in its subsidiary be accounted for consistently. SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. The adoption of the provisions of SFAS No. 160 is not anticipated
to materially impact our consolidated financial position and results of operations.

On
December 21, 2007 the staff of the Securities and Exchange Commission issued SAB No. 110,
which, effective January 1, 2008, amends and replaces SAB 107, Share-Based Payment. SAB
110 expresses the views of the Staff regarding the use of a simplified method
in developing an estimate of expected term of plain vanilla share options in
accordance with SFAS No. 123(R), Share-Based Payment. Under the simplified
method, the expected term is calculated as the midpoint between the vesting date and the
end of the contractual term of the option. The use of the simplified method,
which was first described in SAB 107, was scheduled to expire on December 31, 2007. SAB
110 extends the use of the simplified method for plain vanilla
awards in certain situations. The Staff does not expect the simplified method
to be used when sufficient information regarding exercise behavior, such as historical
exercise data or exercise information from external sources, becomes available. We expect
to continue using the simplified method. As a result, we do not expect that the adoption
of SAB No. 110 will have a significant impact on our consolidated financial statement.

In
June 2007, the Emerging Issues Task Force, or EITF, of the FASB reached a consensus
on Issues 07-03, Accounting for Nonrefundable Advance Payment for Goods or Services
to be Used in Future Research and Development Activities, or EITF 07-03, which addresses
the diversity which exists with respect to the accounting for the non-refundable portion
of a payment made by a research and development entity for future research and development
activities. Under EITF 07-03, an entity would defer and capitalize non-refundable advance
payments made for research and development activities until the related goods are
delivered or the related service are performed. EITF 07-03 is effective for fiscal years
beginning after December 15, 2007. We are in the process of evaluating the impact of EITF
07-03, however, we do not expect it to have a significant impact on our consolidated
financial statements.

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|B. | LIQUIDITY
AND CAPITAL RESOURCES
|-- | -------------------------------

Historically
we have satisfied our financial requirements primarily through equity investments, funds
provided by operations and research and development grants. Until 2006, EZchips
research and development was funded through the proceeds of third party investments,
combined with contributions by LanOptics. Since April 2006, EZchips research and
development efforts have been financed, in part, through grants from the Office of the
Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the OCS.

EZchip
Private Placements. 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.

Under
the terms of the Series C Preferred Share financing, EZchip could raise an aggregate
additional amount of up to $8 million at one or more additional closings to be initiated
within 24 months of the initial investment of $13.5 million On March 9, 2004, EZchip
raised the additional $8 million, of which we invested $5.3 million.

In
July 2005, EZchip raised an additional $10.0 million in a private placement of Series C
Preferred Shares, of which we invested $6.9 million.

Loan.           In
August 2006, EZchip entered into a credit agreement with Plenus II, Limited
          Partnership and Plenus II (D.C.M.), Limited Partnership, as lenders, pursuant
to           which the lenders agreed to make a $4.0 million line of credit available to
          EZchip, which may be increased by an additional $2.0 million upon EZchips
          achievement of certain milestones. Under the terms of the credit agreement,
          EZchip may draw amounts under the line of credit from time to time until August
          2007, at which time the drawn and unpaid amount shall be fixed and the
revolving           line of credit facility shall become a loan. The loan bears annual
interest of           LIBOR+3% for the first two years and LIBOR+4.5% for the third year.
The           principal of the loan shall be repaid in 12 equal monthly payments,
commencing           August 2008. As part of the credit agreement, EZchip issued to the
lenders           910,000 Series C Redeemable Preferred Shares. We acquired these shares
in           December 2006 in exchange for our ordinary shares. In October 2007, EZchip
          repaid the loan in full in an early repayment and the floating charge was
          removed.

Exchange
and Purchase of EZchip Shares. From 2005 through January 2008, we acquired
substantially all of the outstanding EZchip shares. In 2005, 2006 and January 2008 the
EZchip shares were exchanged for our ordinary shares and in August and September 2007 the
EZchip shares were acquired for cash. As a result of such transactions, we currently hold
a 99% ownership interest in EZchip. See Notes 3g, 3h, 3i and 19 to the consolidated
financial statements.

LanOptics
Private Placements. On December 16, 2003, we concluded a $6.0 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% at such time.
The investors in this private placement were granted warrants to purchase an aggregate of
187,500 of our 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 an aggregate of 478,800 ordinary
shares at an exercise price of $15.5 per share with an exercise period of five years.

LanOptics
public offering In August and September 2007, we concluded a $43.6 million public
offering of our ordinary shares, of which a net amount of $14.2 million was used to
increase our ownership interest in EZchip through the purchase of EZchip shares issued
upon the exercise of employee stock options.

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Working
Capital; Cash, Cash Equivalents and marketable securities. As of December 31, 2007 we
had $45.5 million in working capital and $42.6 million in cash, cash equivalents and
marketable securities, compared to $19.4 million in working capital and $17.6 million in
cash, cash equivalent and marketable securities as of December 31, 2006 and $20.6 million
in working capital and $19.6 million in cash, cash equivalents and marketable securities
as of December 31, 2005.

Cash
flows. The following table summarizes our cash flows for the periods presented:

| |                                                     | Year ended December 31,
| | --------------------------------------------------- | -----------------------
|
|
|
|
| | Statement of Cash Flows Data:                       |                        
| | Net cash used in operating activities               |                        
| | Net cash provided by (used in) investing activities |                        
| | Net cash provided by financing activities           |                        
| |                                                     |                        
| | Increase (decrease) in cash and cash equivalents    |                        
| | Cash and cash equivalents - beginning of year       |                        
| |                                                     |                        
| | Cash and cash equivalents - end of year             |                        
| |                                                     |                        

Net cash
used in operating activities was approximately $1.1 million for the year ended December
31, 2007 compared with net cash used in operating activities of approximately $7.1 million
for the year ended December 31, 2006 and $9.0 million for the year ended December 31,
2005. The decrease in cash used for operating activities in 2007 resulted from a 130%
increase in revenue accompanied by a flat rate of cash related operating expenses in 2007,
compared to 2006. There was no material change in the mix or type of expenses resulted in
the net cash used in operating activities between 2007, 2006 and 2005.

Net
cash used in investing activities was approximately $20.1 million for the year ended
December 31, 2007. Of such amount, approximately $14.2 million (net) was used for the
acquisition of EZchip shares that were issued upon the exercise of employee stock options,
approximately $5.6 million was used to purchase marketable securities and approximately
$0.3 million was used to purchase property and equipment. Net cash used in investing
activities was approximately $0.2 million for the year ended December 31, 2006. This
amount was primarily attributable to purchases of property and equipment. Net cash
provided by investing activities was approximately $6.4 million for the year ended
December 31, 2005. Of such amount, approximately $6.6 million resulted from sale and
redemption of marketable securities and approximately $0.2 million was used for purchases
of property and equipment.

For
the year ended December 31, 2007, net cash provided by financing activities was
approximately $40.5 million. This amount is attributable to proceeds of $43.5 million
(net) from our August and September 2007 public offerings, approximately $1.0 million
generated from the exercise of employee stock options and the repayment of a $4.0 million
long term loan. Net cash provided by financing activities was approximately $5.4 million
for the year ended December 31, 2006. This amount is attributable to proceeds of $1.4
million from the exercise of stock options and proceeds of $4 million from a long-term
loan. For the year ended December 31, 2005, net cash provided by financing activities was
approximately $3.2 million. This amount is attributable to proceeds of $0.2 million from
the exercise of stock options and $3.0 million associated with the issuance of
EZchips Series C Preferred Shares to third parties.

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 next 12
months.

|C. | RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES
|-- | ----------------------------------------------

Currently,
84 employees, representing about 75% of our 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.

35

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Since
April 2006, our research and development efforts have been financed, in part, through
grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade
and Labor, or OCS. The following table sets forth our research and development expenses
for the periods indicated:

| |                                        | Year Ended December 31,
| | -------------------------------------- | -----------------------
|
|
|
|
| | Research and development expenses      |                        
| | Office of the Chief Scientist grants   |                        
| | Research and development expenses, net |                        

We
rely primarily on a combination of patents, trademarks, trade secret laws, confidentiality
procedures and licensing arrangements to protect our intellectual property rights, 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 U.S. registered patents:1.    
          No. 6,532,457: Look-ahead tree structure2.    
          No. 6,594,655: Wildcards in radix search tree structures.3.    
          No. 6,625,612: Deterministic search algorithm.4.    
          No. 6,778,534: High-performance network processor.

These
patents 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.

|D. | TREND
INFORMATION
|-- | -----------------

Our
2007 revenues increased 130% to $19.5 million, up from $8.5 million in 2006. This increase
in revenues is mainly attributable to increased purchases by a few NP-2 customers that
entered into the production stage for networking products incorporating our network
processors chips. NP-2 constituted 76% of 2007 revenues; NP-1 contributed 18%; and the 6%
balance resulted mainly from the sale of software tools and services. Two major tier-1
CESR (carrier Ethernet switches and routers) vendors are building several of their CESR
platforms based on EZchip network processors. Juniper Networks, currently our largest
customer, contributed approximately 42% of our 2007 revenues. Juniper continued to launch
products based on our NP-2 processor to production, driving higher NP-2 revenues during
2007. We expect Juniper to continue to launch additional NP-2 and NP-3 based products
during 2008, maintaining and continually growing their contribution to our revenues. The
second vendor, known to be the worlds largest networking vendor, has selected the
special version of NP-3, developed in collaboration with Marvell, for several of its CESR
product lines. The special version of NP-3 is in its final stages of development and we
expect it to move into production in the near future. As of December 31, 2007, we had a
total of 127 design wins of which 61 were in production, 40 with NP-2 and 21 with NP-1.
The remaining 66 design wins are in the product development phase, and we expect a
significant portion of them to enter production during 2008.

Our
chips go into communication equipment that average about two years from design win to
product, and volume orders can be expected only after the customers equipment enters
volume production, which may take one additional year. Consequently, we have not yet
realized the potential of our design wins and our quarterly revenues may fluctuate. We do
not expect that all of our customers will reach production stage, as projects may be
halted, delayed or cancelled. In addition, there is no assurance that products that have
reached production will be successfully accepted in the marketplace. Our future revenue
ramp-up will continue to depend on the success of our customers new products that
incorporate our network processors, on market acceptance of these products, and on the
continued growth of the telecommunications and related markets. See also discussion in
Item 5A Operating Results and Financial Review and Prospects  Operating
Results.

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|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 material contractual obligations as of December 31, 2007:

|                            |  | Payments due by period
|--------------------------- |  | ----------------------
|
|
|
|
|Operating lease obligations |  |                       
|Severance pay (1)           |  |                       
|Total                       |  |                       
|                            |  |                       

---

(1)
          Severance pay relates to accrued severance obligations to our Israeli employees
          as required under Israeli labor law. These obligations are payable only upon
          termination, retirement or death of the respective employee and there is no
          obligation if the employee voluntarily resigns. Of this amount, $0.6 million is
          unfunded.

|ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------- | ------------------------------------------

|A. | DIRECTORS
AND SENIOR MANAGEMENT
|-- | -------------------------------

Set
forth below are the name, age, principal position and a biographical description of each
of our directors and executive officers:

| | Name                      | Age |  | Position(s)                               
| | ------------------------- | --- |  | ------------------------------------------
|
|
|
|
| | Benny Hanigal             | 58  |  | Chairman of the Board                     
| | Eli Fruchter              | 52  |  | Director and President and Chief Executive
| |                           |     |  | Officer of EZchip Technologies Ltd.       
| | Dror Israel               | 39  |  | Chief Financial Officer                   
| |                           |     |  | Vice President - Business Development of  
| | Amir Eyal                 | 48  |  | EZchip                                    
| | Ran Giladi (1)            | 53  |  | Director                                  
| | Karen Sarid (1)(3)        | 57  |  | Director                                  
| | Shai Saul (1)(2)(3)       | 46  |  | Director                                  
| | David Schlachet (1)(2)(3) | 62  |  | Director                                  

---

| | (1) | Independent
Director under rules of the Securities and Exchange                     Commission
and NASDAQ Marketplace Rules (see explanation below)
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Outside
Director within the meaning of the Israeli Companies Law                     (see
explanation below)
| | --- | --------------------------------------------------------------------------------------------------------------

| | (3) | Member
of our Audit Committee.
| | --- | ------------------------------

Benny
Hanigal has served as the Chairman of our Board of Directors since December
2007, and as the Chairman of the Board of Directors of EZchip since December 2006. Since
August 2001, Mr. Hanigal has been a partner in Sequoia Capital Venture Fund. In 1985, Mr.
Hanigal founded Lannet Ltd., of which Mr. Hanigal served as President and Chief Executive
Officer until 1995. In 1995, Lannet was acquired by Madge Networks N.V., which thereafter
employed Mr. Hanigal until he left in June 1997. From January 1998 until 2001, Mr. Hanigal
served as a managing director of a company that manages one of the Star funds. Mr. Hanigal
also serves as a director of Alvarion Ltd. Mr. Hanigal has a B.Sc. degree in Electrical
Engineering from the Technion -Israel Institute of Technology.

Eli
Fruchter  serves as the President and Chief Executive Officer of EZchip, a
position that he has held since EZchips inception in May 1999, and has served as a
director of our company since its inception and Chairman of our Board of Directors from
December 2006 until December 2007. Mr. Fruchter co-founded our company and from 1990 to
1999 he served as our General Manager and the Chairman of our Board of Directors. Prior to
that, he was also among the founders of Adacom Technologies Ltd., a manufacturer of data
communications products. Mr. Fruchter holds a B.Sc. degree in Electrical Engineering from
the Technion-Israel Institute of Technology.

37

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

Amir
Eyal has served as Vice President  Business Development of EZchip
technologies Ltd. since August 1999. From 1997 to 1998, Mr. Eyal served as Vice President
of Marketing at CLASS Data Systems, a start-up that provides solutions for network Quality
of Service. The company was acquired by Cisco Systems in 1998. From 1996 to 1997, Mr. Eyal
served as Vice President, Marketing at ORNET Data Communications, a LAN switch vendor.
From 1994 to 1996, Mr. Eyal served as Director of Marketing at RAD Network Devices, a
router vendor and member of the RAD-BYNET Group and served in pre-sale and post-sale roles
at that company from 1988-1994. From 1986 to 1988, Mr. Eyal was a chip design engineer at
Clarity, a chip design start-up. Mr. Eyal holds a B.Sc. degree in Computer Engineering
from the Technion-Israel Institute of Technology.

Prof.
          Ran Giladi has served as a director of our company since December
          2001.  Prof. Giladi is a faculty member of 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.  Prof. Giladi was
          the active Chairman of DiskSites, Inc., which was acquired by Expand Networks
          Ltd. in 2006.  Prof. Giladi co-founded InfoCyclone Inc., which produces
          storage appliances for owners of massively accessed repositories and of which
he           was President and Chief Executive Officer from 2000 until 2002.  Prof.
          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.  His research interests include computer and communications
          systems performance, data networks and communications, and network management
          systems. Prof. Giladi holds a B.Sc. degree in Physics and M.Sc. degree in
          Biomedical Engineering, both from the Technion  Israel Institute of
          Technology, and a Ph.D. in Computers and Information Systems from Tel-Aviv
          University.

Karen
Sarid has served as a director of our company since December 2001. Ms.
Sarid has served as the General Manager of Galil Medical Israel since 2007. Prior to that
and from 2005, Ms. Sarid served as a General Manager of Orex Computed Radiography Ltd., a
Kodak Company focusing on radiography systems for the digital x-ray market. Prior thereto
and from September 2000, Ms. Sarid held the position of Chief Operating Officer and Chief
Financial Officer at Orex Computed Radiography Ltd. From September 1999 until September
2000, Ms. Sarid 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 the
NASDAQ Stock Market. Ms. Sarid was Chief Financial Officer of our company from 1993
through 1996. Ms. Sarid also serves as a director of Oridion Systems Ltd.. Gilat Satellite
Networks Ltd. and Endymion Medical Ltd. Ms. Sarid holds a B.A. degree in Economics and
Accounting from Haifa University, and was awarded the Chief Financial Officer of the Year
award in 1998 by the Association of Chief Financial Officers in Israel.

Shai
Saul has served as a director of our company since December 2006. Mr. Saul
has served as the General Partner of DFJ Tamir Fishman Ventures, an Israeli
technology-focused venture capital fund, since 1999. During 2001, he acted as CEO of
CopperGate Communications. From 1994 to 1999, Mr. Saul served as Executive Vice President
of Aladdin Knowledge Systems Ltd. (NASDAQ: ALDN), a leading provider of digital rights
management and security solutions. From 1993 to 1994, Mr. Saul served as chief executive
officer of Ganot Ltd., a cleantech company. Mr. Saul also serves as Chairman of the board
of directors of CopperGate Communications and as a director of Allot Communications Ltd.
and previously served as a director of Native Networks and Teleknowledge. Mr. Saul holds
an LL.B. degree from Tel Aviv University.

David
Schlachet has served as director of our company since September 2005. Mr.
Schlachet has served as chief executive officer of Syneron Medical Ltd. since November
2005, after having served as chief financial officer of Syneron Medical Ltd. from July
2004. From 2000 to June 2004, Mr. Schlachet served as Managing Partner of Biocom, a
venture capital fund specializing in the life sciences area. From 1995 to 2000, Mr.
Schlachet served as a senior Vice President and Chief Financial Officer of Strauss Elite
Holdings, a packaged food group. He also served as an active Chairman of Elite Industries
Ltd. From 1988 to 1995, Mr. Schlachet served first as Chief Executive Officer of Yeda, the
Weizmann Institute technology transfer company, and later as Vice President of Finance and
Administration of the Weizmann Institute of Science. Mr. Schlachet serves as a director
and chairman of the audit committee for NASDAQ-listed companies Pharmos Inc. and Compugen
Ltd., and is a director of Adgar Investment and Development, which is listed on the Tel
Aviv Stock Exchange. Mr. Schlachet holds a B.Sc. degree in chemical engineering and an
M.B.A. from Tel-Aviv University.

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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 2007 to all of our directors and executive
officers as a group (eight persons) for services in all capacities was approximately
$534,000. This amount does not include expenses we incurred for other payments, including
dues for professional and business associations, business travel and other expenses and
benefits commonly reimbursed or paid by companies in Israel. The aggregate amount set
aside or accrued during 2007 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 $15,000. All our executive officers work full time
for us.

During
the year ended December 31, 2007, we paid each of our outside directors approximately
$1,480 per quarter and approximately $316 per meeting attended. Our other directors did
not receive any cash compensation during 2007. Effective as of January 1, 2008, we pay a
$3,000 monthly fee to Mr. Benny Hanigal in connection with his services as Chairman of our
Board of Directors, as approved by our 2007 annual general meeting of shareholders. Prior
to that date and from December 2006, Mr, Hanigal was paid the same monthly amount for his
services as the Chairman of the Board of Directors of EZchip.

During
2007, we granted our directors and executive officers as a group options to purchase an
aggregate of 81,000 ordinary shares, with a weighted average exercise price of $12.23 that
expire in 2012, and 9,000 restricted share units that expire in 2012, all of which options
and RSUs were granted under the LanOptics Ltd. 2003 Amended and Restated Equity Incentive
Plan. In May 2007, we also granted to our directors and executive officers options to
purchase an aggregate of 1,050,000 of EZchips ordinary shares at a price per share
of $0.40 that expire in 2011, under the EZchip 2003 Section 102 Share Option Plan. These
options were granted as part of a one-time stock option allocation to veteran employees of
EZchip, in replacement of options previously granted to such employees that expired in
2007 after a seven year term, and have the same exercise price as the expired options. See
Item 6E. Directors, Senior Management and Employees  Share Ownership 
Equity Incentive Plans.

We
follow Israeli law and practice, instead of the NASDAQ Marketplace requirements, regarding
the compensation of our executive officers. See below in this Item 6.C. Directors,
Senior Management and Employees  Board Practices  NASDAQ Marketplace Rules and
Home Country Practices.

|C. | BOARD
PRACTICES
|-- | ---------------

# Election of Directors

Our
board of directors currently consists of six members. Under our articles of association,
the board is to consist of between three and fourteen members, with the number fixed from
time to time by our shareholders.

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.

We
do not follow the requirements of the NASDAQ Marketplace Rules with regard to the
nomination process of directors, and instead, we follow Israeli law and practice, in
accordance with which our directors are recommended by our board of directors for election
by our shareholders. See below in this Item 6C. Directors, Senior Management and
Employees  Board Practices  NASDAQ Marketplace Rules and Home Country
Practices.

39

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# 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.

# Outside and Independent
Directors

Outside
Directors. In accordance with the Israeli Companies Law, as an Israeli public company,
we are required to have at least two outside directors. The outside directors must meet
certain statutory requirements of independence. In general, the term of office of an
outside director is three years, which can be extended for one additional three year-term
(there are no prescribed terms of service for the other directors of the company).
However, Israeli companies listed on certain stock exchanges outside Israel, including the
NASDAQ Global Market, such as our company, may appoint an outside director for additional
terms of not more than three years subject to certain conditions. Such conditions include
the determination by the audit committee and board of directors, that in view of the
directors professional expertise and special contribution to the companys
board of directors and its committees, the appointment of the outside director for an
additional term is in the best interest of the company. An outside director can be removed
from office only under very limited circumstances.

Any
committee of the board of directors must include at least one outside director and the
audit committee must include all of the outside directors. An outside director is entitled
to compensation as provided in regulations adopted under the Israeli Companies Law and is
otherwise prohibited from receiving any other compensation, directly or indirectly, in
connection with such service.

In
accordance with the Israeli Companies Law, at least one of the outside directors must have
accounting and financial expertise and any other outside director must have
accounting and financial expertise or professional qualification,
as such terms are defined by regulations promulgated under the Israeli Companies Law.
However, Israeli companies listed on certain stock exchanges outside Israel, including the
NASDAQ Global Market, such as our company, are not required to appoint an outside director
with accounting and financial expertise if a director with accounting and
financial expertise who qualifies as an independent director for purposes of audit
committee membership under the laws of the foreign country in which the stock exchange is
located serves on its board of directors. All of the outside directors of such a company
must have professional qualification. Our outside director, Mr. David
Schlachet, has accounting and financial expertise and our other outside
director, Mr. Shai Saul, has professional qualification, as such terms are
defined by regulations promulgated under the Israeli Companies Law.

Outside
directors are elected by a majority vote at a shareholders meeting. In addition to
the majority vote, the shareholder approval of the election of an outside director must
satisfy either of two additional tests:

| |  | the
majority includes at least one-third of the shares voted by shareholders other than our
              controlling shareholders; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares, other than shares held by controlling shareholders, voted against
the election of the outside director does not exceed 1% of the aggregate voting rights of
our company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Messrs,
Shai Saul and David Schlachet serve as our outside directors under the Israeli Companies
Law. Mr. Sauls term will expire at our 2009 annual meeting of shareholders and Mr.
Schlachets term will expire in 2008, following which their service as an outside
director may each be extended for additional three-year terms.

Independent
Directors. In general, NASDAQ Marketplace Rules require that the board of directors of
a NASDAQ-listed company have a majority of independent directors and its audit committee
must have at least three members and be comprised only of independent directors, each of
whom satisfies the respective independence requirements of NASDAQ and the
Securities and Exchange Commission. Our Board of Directors has determined that each of
Messrs. Giladi, Saul and Schlachet and Ms. Sarid qualifies as an independent director
under the requirements of the Securities and Exchange Commission and NASDAQ.

40

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# Audit Committee

The
Israeli Companies Law requires public companies to appoint an audit committee. An audit
committee must consist of at least three directors including all 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. 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. 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.

Under
the NASDAQ Marketplace Rules we are required to have an audit committee consisting of at
least three independent members, each of whom is financially literate and satisfies the
respective independence requirements of the Securities and Exchange Commission
and NASDAQ and one of whom has accounting or related financial management expertise at
senior levels within a company.

Our
Audit Committee currently consists of Shai Saul, Karen Sarid and David Schlachet. We
believe that the composition and function of the audit committee comply with the
requirements of the Israel Companies Law, the Securities and Exchange Commission and
NASDAQ Marketplace Rules.

# Risk Management Committee

Our
board of directors has formed a Risk Management Committee to supervise currency risk
management and the investment of our companys funds. Our Risk Management Committee
currently consists of Eli Fruchter and David Schlachet. Our Chief Financial Officer, Dror
Israel, and an outside consultant in the field of risk management regularly advise the
committees members.

# 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. The internal auditor may be an
employee of ours, but may not be an interested party or office holder, or a relative of
any interested party or office holder, and may not be a member of our independent
accounting firm or its representative. 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.

# Directors Service
Contracts

We
do not have any service contracts with our directors, except for the $3,000 monthly fee we
pay to Mr. Benny Hanigal commencing January 1, 2008 in connection with his services as
Chairman of our Board of Directors, as approved by our 2007 annual general meeting of
shareholders. Prior to that date and from December 2006, Mr, Hanigal was paid the same
monthly amount for his services as the Chairman of the Board of Directors of EZchip.

There
are no arrangements or understandings between us and any of our subsidiaries, on the one
hand, and any of our directors, on the other hand, providing for benefits upon termination
of their employment or service as directors of our company or any of our subsidiaries.

# Fiduciary Duties;
Approval of Certain Transactions

Fiduciary
Duties. 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.

41

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Duty
of loyalty. The duty of loyalty requires an office holder to act in good faith and for
the benefit of the company, including to avoid 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 or her position as an office holder. A company may
approve any of the acts mentioned above provided that all the following conditions apply:
the office holder acted in good faith and neither the act nor the approval of the act
prejudices the good of the company and, the office holder disclosed the essence of his
personal interest in the act, including any substantial fact or document, a reasonable
time before the date for discussion of the approval.

Duty
of care. The duty of care requires an office holder to act with a level of care that a
reasonable office holder in the same position would employ under the same circumstances.
This includes the duty to use reasonable means to obtain information regarding the
advisability of a given action submitted for his or her approval or performed by virtue of
his or her position and all other relevant information material to these actions. 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.

An
office holder is defined as any director, managing director, general manager,
chief executive officer, executive vice president, vice president, other manager directly
subordinate to the general manager or any other person assuming the responsibilities of
any of these positions regardless of that persons title. Each person listed in the
table under Director and senior management is an office holder.

Disclosure
of personal interest.The Israeli Companies Law requires that an office holder
promptly disclose to the company 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. Personal interest, as defined by the
Companies Law, includes a personal interest of any person in an act or transaction of the
company, including a personal interest of his relative or of a corporation in which that
person or a relative of that person is a 5% or greater shareholder, a holder of 5% or more
of the voting rights, a director or general manager, or in which he or she has the right
to appoint at least one director or the general manager. Personal interest
does not apply to a personal interest stemming merely from holding shares in the company.

The
office holder must make the disclosure of his personal interest no later than the first
meeting of the companys board of directors that discusses the particular
transaction. This duty does not apply to the personal interest of a relative of the office
holder in a transaction unless it is an extraordinary transaction. 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, and a
relative as a spouse, sibling, parent, grandparent, descendent, spouses
descendant and the spouse of any of the foregoing.

Approvals.           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. Our articles of association do not provide otherwise. Such approval
          must determine that the transaction is not adverse to the companys
          interest. If the transaction is an extraordinary transaction or if it concerns
          exculpation, indemnification or insurance of an office holder, 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 unless a majority of the board of
directors or the audit           committee has a personal interest in the matter. If a
majority of the board of           directors or the audit committee has a personal
interest in the transaction,           shareholder approval also would be required.

42

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Duties
of shareholders.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. Two or more shareholders with a personal interest in the approval
of the same transaction are deemed to be one shareholder.

Approval
of the audit committee, the board of directors and our shareholders, in that order, is
required for:

| |  | extraordinary
transactions, including a private placement, with a controlling shareholder or in
              which a controlling shareholder has a personal interest; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
terms of compensation or employment of a controlling shareholder or his or her relative,
as               an officer holder or employee of our company.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

The
shareholders approval must include the majority of shares voted at the meeting. In
addition to the majority vote, the shareholder approval must satisfy either of two
additional tests:

| |  | the
majority includes at least one-third of the shares voted by shareholders who have no
              personal interest in the transaction; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares, other than shares held by the disinterested shareholders, that
voted against the approval of the transaction does not exceed 1% of the aggregate voting
rights of our company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under
the Israeli Companies Law, a shareholder also 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:

| |  | any
amendment to the articles of association;
| | - | ---------------------------------------------

| |  | an
increase of the company's authorized share capital;
| | - | ------------------------------------------------------

| |  | a
merger; or
| | - | ------------

| |  | 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. The Israeli Companies Law also provides that a
breach of the duty of fairness will be governed by the laws governing breach of contract;
however, the Israeli Companies Law does not describe the substance of this duty.

# Indemnification of
Directors and Officers; Limitations on Liability

Indemnification of Office
Holders

Under
the Israeli Companies Law, a company may, if permitted by its articles of
association, indemnify an office holder for any of the following liabilities or
expenses that they may incur due to an act performed or failure to act in his or
her capacity as the companys office holder:

| |  | monetary
liability imposed on the office holder in favor of a third party in a judgment,
              including a settlement or an arbitral award confirmed by a court;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
legal costs, including attorneys fees, expended by an office holder as a result of
an investigation or proceeding instituted against the office holder by a competent
authority, provided that such investigation or proceeding concludes without the filing of
an indictment against the office holder and either: no financial liability was imposed on
the office holder in lieu of criminal proceedings, or a financial liability was imposed
on the office holder in lieu of criminal proceedings with respect to an alleged criminal
offense that does not require proof of criminal intent; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

43

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| |  | reasonable
legal costs, including attorneys fees, expended by the office holder or for which
the office holder is charged by a court:
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | in
an action  brought  against the office  holder by the company,  on behalf of the company
or on                             behalf of a third party,
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | in
a criminal action from which the office holder is acquitted, or
| | - | ------------------------------------------------------------------

| |  | in
a criminal action in which the office holder is convicted of a criminal offense which
does not require proof of criminal intent.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

A
company may indemnify an office holder in respect of these liabilities either in advance
of an event or following an event. If a company undertakes to indemnify an office holder
in advance of an event, the indemnification, other than legal costs, must be limited to
foreseeable events in light of the companys actual activities when the company
undertook such indemnification, and reasonable amounts or standards, as determined by the
board of directors.

Insurance of Office
Holders

Under
the Israeli Companies Law, a company may, if permitted by its articles of association,
obtain insurance for an office holder against liabilities incurred in his or her capacity
as an office holder. These liabilities include a breach of duty of care to the company or
a third-party, a breach of duty of loyalty and any monetary liability imposed on the
office holder in favor of a third-party.

Exculpation of Office
Holders

The
Israeli Companies Law, a company may, if permitted by its articles of association, also
exculpate an office holder from a breach of duty of care in advance of that breach. Our
articles of association provide for exculpation both in advance or retroactively, to the
extent permitted under Israeli law. A company may not exculpate an office holder from a
breach of duty of loyalty towards the company or from a breach of duty of care concerning
dividend distribution or a purchase of the companys shares by the company or other
entities controlled by the company.

Limitations on
Exculpation, Insurance and Indemnification

Under
the Israeli Companies Law, a company may indemnify or insure an office holder against a
breach of duty of loyalty only to the extent that the office holder acted in good faith
and had reasonable grounds to assume that the action would not prejudice the company. In
addition, a company may not indemnify, insure or exculpate an office holder against a
breach of duty of care if committed intentionally or recklessly (excluding mere
negligence), or committed with the intent to derive an unlawful personal gain, or for a
fine or forfeit levied against the office holder in connection with a criminal offense.

Pursuant
to the Israeli Companies Law, exculpation of, procurement of insurance coverage for, and
an undertaking to indemnify or indemnification of, our office holders must be approved by
our audit committee and our board of directors and, if the office holder is a director,
also by our shareholders.

Our
articles of association allow us to indemnify, exculpate and insure our office holders to
the fullest extent permitted under the Israeli Companies Law, provided that procuring this
insurance or providing this indemnification or exculpation is approved by the audit
committee and the board of directors, as well as by the shareholders if the office holder
is a director. Our audit committee, board of directors and shareholders have resolved to
indemnify our directors and officers to the extent permitted by law and by our articles of
association for liabilities not covered by insurance, that are of certain enumerated types
of events, and subject to limitations as to amount.

# NASDAQ Marketplace Rules
and Home Country Practices

Under
NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers, such as our company,
are permitted to follow certain home country corporate governance practices instead of
certain provisions of Rule 4350. A foreign private issuer that elects to follow a home
country practice instead of any of such provisions of Rule 4350, must submit to NASDAQ, in
advance, a written statement from an independent counsel in such issuers home
country certifying that the issuers practices are not prohibited by the home
countrys laws.

44

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On
July 27, 2005, we provided NASDAQ with a notice of non-compliance with Rule 4350. In
practice, we do not comply with the NASDAQ requirements regarding the director nominations
process, compensation of executive officers and the distribution of annual reports.
Instead, we follow Israeli law and practice in accordance with which our directors are
recommended by our board of directors for election by our shareholders, our board sets
executive compensation, subject to the required approvals under Israeli law, and we post
our annual reports or Form 20-F on our website. See above in this Item 6C.
Directors, Senior Management and Employees  Board Practices  Election of
Directors and Directors, Senior Management and Employees  Board
Practices  Fiduciary Duties; Approval of Certain Transactions.

|D. | EMPLOYEES
|-- | ---------

As
of March 27, 2008, we had 113 employees. The following table presents the number of our
employees categorized by activity as of December 31:

| |                            | As of December 31,
| | -------------------------- | ------------------
|
|
|
|
| | Operations                 |                   
| | Research and development   |                   
| | Sales and marketing        |                   
| | General and administrative |                   
| |                            |                   
| | Total (1)                  |                   
| |                            |                   

The
following  table presents the number of our employees  categorized by geographic
 location as of December 31:

| |               | As of December 31,
| | ------------- | ------------------
|
|
|
|
| | Israel (1)    |                   
| | United States |                   
| | China         |                   
| |               |                   
| | Total         |                   
| |               |                   

We
believe that our company has good relations with its employees and we have never
experienced a labor dispute, strike or work stoppage.

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 our 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 13.3% of base wages to such plans and
employees contribute between 5.0% to 7% of their base wages. We also contribute 7.5% of
base wages to certain professional advancement funds for our employees and
they contribute 2.5% of base wages. Our contribution is limited to the maximum amounts
that 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. The payments to the National
Insurance Institute are determined progressively in accordance with wages.

45

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|E. | SHARE
OWNERSHIP
|-- | ---------------

# Beneficial Ownership of
Executive Officers and Directors

None
of our directors and executive officers holds more than 1% of our outstanding shares,
other than Eli Fruchter, a member of our Board of Directors and President and Chief
Executive Officer of EZchip. For Mr. Fruchters holdings, see Item 7A Major
Shareholders and Related Party Transactions  Major Shareholders.

As
of December 31, 2007, our executive officers and directors as a group held options to
purchase an aggregate of 86,000 of our ordinary shares. The weighted average exercise
price of these options is $11.9 and their expiration dates range from January 2012 to
October 2013. As of December 31, 2007, our executive officers and directors as a group
also held 9,000 restricted share units. For information regarding ownership of our
ordinary shares by our directors and executive officers as a group, see Item 7.A.
Major Shareholders and Related Party Transactions  Major Shareholders.

# Equity Incentive Plans

LanOptics Equity
Incentive Plans

2003
Amended and Restated Equity Incentive Plan. On October 2003, LanOptics adopted the
2003 Israeli Share Option Plan. The plan was amended in December 2006 and further amended
in December 2007. The plan was renamed the LanOptics Ltd. 2003 Amended and Restated Equity
Incentive Plan, or the 2003 Israel Plan. Up to 1,770,000 ordinary shares may be granted
under the 2003 Israel Plan, which amount is reduced by three shares for each restricted
share unit that we grant under the plan and by one share for each option that we grant
under the plan. The 2003 Israel Plan is administered by the Board of Directors, or a
committee of the Board that is delegated authority to act as the administrator. The
administrator has broad discretion, subject to certain limitations, to determine the
persons entitled to receive awards, the terms and conditions on which awards are granted
and the number of shares subject to each award granted. Under the 2003 Israel Plan, we may
grant restricted share units, or RSUs, and options to purchase our ordinary shares to
Israeli employees, directors, consultants, advisers and service providers of our company
and its subsidiaries. In accordance with the terms and conditions imposed by Section 102
of the Israel Income Tax Ordinance, grantees who receive awards under the 2003 Israel Plan
are afforded certain tax benefits (excluding our controlling shareholders or those who are
not our employees or directors). We have 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 awards in the name of a
trustee for each of the employees who is granted awards. Each award, and any ordinary
shares acquired upon the exercise of the award, must be held by the trustee for a period
of 24 months . The 2003 Israel Plan provides for the awards granted to have a maximum
exercise period of ten years from the date of grant. Awards granted under the 2003 Israel
Plan are generally exercisable over four years. Awards that are not exercised will become
available for further grant by the Board under the 2003 Israel Plan. In addition, pursuant
to amendment to the 2003 Israel Plan approved by our shareholders in December 2007, on
January 1st of each year, commencing January 1, 2009, to the extent the number of ordinary
shares reserved, authorized and available for issuance under the 2003 Israel Plan on such
date is less than 4% of the number of ordinary shares issued and outstanding on such date,
the number of ordinary shares reserved, authorized and available for issuance under the
2003 Israel Plan will automatically increase on such date to equal 4% of the number of
ordinary shares issued and outstanding on such date.

As
of December 31, 2007, there were options to purchase an aggregate of 86,000 ordinary
shares outstanding under the 2003 Israel Plan. All of these options were exercisable at an
weighted average exercise price of $11.9 per share. In addition, as of December 31, 2007,
there were 29,250 RSUs outstanding under the 2003 Israel Plan.

46

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LanOptics
Ltd. 2007 U.S. Equity Incentive Plan. On December 27, 2007, LanOptics adopted the 2007
U.S. Equity Incentive Plan, or the 2007 U.S. Plan. Up to 500,000 ordinary shares may be
granted under the 2007 U.S. Plan, which amount is reduced by three shares for each
restricted share unit that we grant under the plan and by one share for each option that
we grant under the plan. Except as required to address specific U.S. tax requirements, the
general terms and conditions of the 2007 U.S. Plan are substantially similar to the terms
and conditions of the 2003 Israel Plan. In general, the exercise price of incentive stock
options granted under the 2007 U.S. Plan must be at least equal to 100% of the fair market
value of the ordinary shares on the date of grant. If, however, incentive stock options
are granted to an employee who owns shares possessing more than 10% of the voting power of
all classes of our share capital or the share capital of any parent or subsidiary of us,
the exercise price of any incentive stock option granted must equal at least 110% of the
fair market value on the grant date and the maximum term of such incentive stock options
must not exceed five years.

As
of December 31, 2007, no awards were granted under the 2007 U.S. Equity Incentive Plan.

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 16,500,000 ordinary shares of EZchip were 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 seven to
ten years from the date of the grant, and are non-transferable, except under the laws of
succession.

Following
our acquisition of substantially all of EZchips shares, we discontinued our practice
of granting EZchip employees options to purchase shares of EZchip pursuant to the EZchip
option plans. Instead, all future incentive awards to EZchip employees will consist of
options or restricted share units to purchase ordinary shares of our company.

As
of December 31, 2007, there were outstanding options to purchase ordinary shares of EZchip
representing approximately 9.9% of the share capital of EZchip on an as converted and
fully diluted basis. Approximately 21% of these options were held by directors and
officers of our company. During 2007, we purchased from employees and former employees of
EZchip approximately 4,374,458 EZchip ordinary shares issued upon exercise of employee
stock options for approximately $14.2 million, net of the exercise prices paid by the
employees and former employees.

|ITEM  7. | MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|-------- | -------------------------------------------------

|A. | MAJOR
SHAREHOLDERS
|-- | ------------------

The
following table sets forth certain information as of March 27, 2008 (unless otherwise
indicated below) for (i) each shareholder known to us to beneficially own more than
5% of our outstanding ordinary shares, (ii) each of our executive officers and directors
that beneficially owns more than 1% of our outstanding ordinary shares, and (iii) our
executive officers and directors as a group. The information in the table below is based
on 23,324,086 ordinary shares outstanding as of March 27, 2008. Each of our outstanding
ordinary shares has identical rights in all respects.

| | Name                                                            | Number of Shares(1) | Percent
| | --------------------------------------------------------------- | ------------------- | -------
|
|
|
|
| | JK&B Capital (2)                                                |                     |        
| | The Goldman Sachs Group, Inc. (3)                               |                     |        
| | Eli Fruchter (4)                                                |                     |        
| | All directors and executive officers as a group (8 persons) (5) |                     |        

---

| | (1) | The
number of ordinary shares beneficially owned includes the shares issuable
               pursuant to options and restricted share units that are exercisable within
60                days of the date of this table. Shares issuable pursuant to such
options or                restricted share units are deemed outstanding for computing the
percentage of                the person holding such options or restricted share units
but are not                outstanding for computing the percentage of any other person.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

47

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| | (2) | Based
on Schedule 13G filed with the Securities and Exchange Commission on
               January 8, 2008 and other information available to the company. The
aggregate                number of shares includes 2,563,715 ordinary shares beneficially
held by                JK&B Shalom II, LLC and 25,896 ordinary shares beneficially
held by JK&B                Capital III, Civil Law Partnership. JK&B Shalom II,
LLC is a Delaware                Limited Liability Company.  JK&B Capital, LLC
is the manager of                JK&B Shalom II, LLC, and may be deemed to have
shared power to vote and                dispose of shares directly owned by JK&B
Shalom II, LLC.  David                Kronfeld is the manager of JK&B Capital,
LLC and may be deemed to have                shared power to vote and dispose of shares
directly owned by JK&B Shalom II,                LLC.  JK&B Capital III,
Civil Law Partnership, is a German civil                law partnership.  JK&B
Capital, LLC is the managing partner of                JK&B Capital III,
Civil Law Partnership and may be deemed to have                shared power to vote
and dispose of shares directly owned by JK&B Capital                III, Civil Law
Partnership.  David Kronfeld is the manager of JK&B                Capital, LLC
and may be deemed to have shared power to vote and dispose of                shares
directly owned by JK&B Capital III, Civil Law Partnership.  The
               address for each of JK&B Shalom II, LLC, JK&B Capital III, Civil
Law                Partnership, JK&B Capital, LLC and David Kronfeld is Two
Prudential Plaza,                180 N. Stetson Avenue, Suite 4500, Chicago, Illinois
60601.  Each                of JK&B Shalom II, LLC, JK&B Capital III,
Civil Law Partnership,                JK&B Capital, LLC and David Kronfeld disclaims
beneficial ownership of the                shares except to the extent of its pecuniary
interest therein.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Based
on Schedule 13G filed with the Securities and Exchange Commission on
               January 9, 2008 and other information available to the company. The
aggregate                number of shares includes 248,830 ordinary shares beneficially
held by The                Goldman Sachs Group, Inc., 124,415 ordinary shares
beneficially held by GS EZC                Employee Holdings, L.L.C., 2,015,364 ordinary
shares beneficially held by GS PEP                Tech EZC Holdings, L.L.C., and 33,621
ordinary shares beneficially held by GS                PEP 1999 Direct EZC Holdings,
L.L.C. The Goldman Sachs Group, Inc. is a                reporting company under the
Securities Exchange Act of 1934. The managing member                of each of GS EZC
Employee Holdings, L.L.C, GS PEP Tech EZC Holdings, L.L.C. and                GS PEP 1999
Direct EZC Holdings, L.L.C. (collectively, the GS Funds)                are
wholly owned subsidiaries of The Goldman Sachs Group, Inc. and as such, The
               Goldman Sachs Group, Inc. has voting and investment control over the
shares held                by the GS Funds. The 248,830 ordinary shares shown above as
held by The Goldman                Sachs Group, Inc. do not include the shares held by
the GS Funds. The Goldman                Sachs Group Inc. disclaims beneficial ownership
of the shares held by the GS                Funds, except to the extent of their
pecuniary interest in such shares. The                address for each of the GS Funds is
85 Broad Street, New York, New York 10004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Based
on Schedule 13G/A filed with the Securities and Exchange Commission on
               February 9, 2007 and other information available to the company. The
address for                Mr. Fruchter is c/o LanOptics Ltd., 1 Hatamar Street, P.O. Box
527, Yokneam                20692, Israel.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | As
of March 27, 2008 all directors and executive officers as a group (eight
               persons) held options to purchase an aggregate of 41,000 ordinary shares
and                9,000 RSUs exercisable within 60 days of the date of the table into at
a                weighted average exercise price of $11.6. The options and RSUs expire
between                January 2012 and October 2013
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Significant Changes in
the Ownership of Major Shareholders

Nokia
Venture Partners. On February 9, 2007, Nokia Venture Partners II, L.P., or NVP II,
filed a Schedule 13G with the Securities and Exchange Commission reflecting ownership of
1,577,362, or 10.06%, of our ordinary shares. The Schedule 13G reflects that of such
shares, 1,559,879 ordinary shares are directly owned by NVP II and 17,483 ordinary shares
are directly owned by NVP II Affiliates Fund, L.P., or NVPA. On March 26, 2007, NVP II
filed Amendment No. 1 to Schedule 13G with the Securities and Exchange Commission
reflecting ownership of 1,051,574, or 8.7%, of our ordinary shares. The Amendment No. 1 to
Schedule 13G reflects that of such shares, 1,051,574 ordinary shares are directly owned by
NVP II and 11,655 ordinary shares are directly owned by NVPA. On February 8, 2008, NVP II
filed Amendment No. 2 to Schedule 13G with the Securities and Exchange Commission to
report it no longer owned any of our ordinary shares as of December 31, 2007.

48

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Dr.
          Meir Barel. On December 28, 2006, Dr. Meir Barel filed a Schedule 13G with
          the Securities and Exchange Commission reflecting ownership of 1,944,204, or
          12.4%, of our ordinary shares. The Schedule 13G reflects that of such shares,
          735,797 ordinary shares are held by Star-Seed Managementgesellschaft mbH, or
          Star Seed, and 1,208,407 ordinary shares are beneficially held by SVM Star
          Ventures Managementgesellschaft mbH Nr. 3., or Star 3. The Schedule 13G states
          Dr. Barel is the sole director and primary shareholder of SVM 3 and Seed GmbH
          and as such, he may be deemed to be the beneficial holder of, and to share the
          power to vote and dispose of, the shares owned directly and indirectly by SVM 3
          and Seed GmbH. Dr. Barel, Seed GmbH and SVM 3 each disclaim beneficial
ownership           of all of the foregoing shares except to the extent of any pecuniary
interest           therein, except for 15,633 ordinary shares held by SVM 3 as Trustee
for Dr.           Barel. On May 3, 2007, Dr. Meir Barel filed Amendment No. 1 to Schedule
13G with           the Securities and Exchange Commission reflecting ownership of
749,495, or 4.8%,           of our ordinary shares. The Amendment No. 1 to Schedule 13G
reflects that of           such shares, 283,651 ordinary shares are held by Star Seed and
465,844 ordinary           shares are beneficially held by Star 3.

JK&B
Capital and The Goldman Sachs Group. On January 22, 2008, we issued an aggregate of
5,011,841 of our ordinary shares to The Goldman Sachs Group, Inc. and three of its
affiliates and to JK&B Shalom II LLC and JK&B Capital III, Civil Law Partnership
in exchange for the EZchip shares previously held by them. The ordinary shares were issued
pursuant to an exchange right agreement LanOptics entered into with these shareholders.
See Item 7.B. Major Shareholders and Related Party Transactions  Related Party
Transactions.

James
Cheney. In August and September 2007, we issued and sold in private placements an
aggregate of 900,000 of our ordinary shares to James Cheney. In March 2008, Mr. Cheney
informed us that he ceased to be the beneficial owner of more than 5% of our outstanding
shares.

# Major Shareholders
Voting Rights

The
voting rights of our major shareholders do not differ from the voting rights of other
holders of our ordinary shares.

# Record Holders

Based
on a review of the information provided to us by our transfer agent, as of March 27, 2008,
there were 41 holders of record of our ordinary shares, including 35
holders of record residing in the United States holding 22,909,497 ordinary shares, or
98.2% of the aggregate 23,324,086 ordinary shares outstanding as of such date. These
numbers are not representative of the number of beneficial holders of our shares nor is it
representative of where such beneficial holders reside since many of these ordinary shares
were held of record by brokers or other nominees (including one U.S. nominee company, CEDE
& Co., which held approximately 76.7% of our outstanding ordinary shares as of
such date).

|B. | RELATED
PARTY TRANSACTIONS
|-- | --------------------------

Exchange
Right Agreement.In May 2003, we executed an exchange right agreement with all of
EZchips major shareholders. Pursuant to the agreement, EZchips four major
shareholders were granted the right to exchange all their shares in EZchip for our
ordinary shares, subject to the fulfillment of certain conditions (as fully described in
Note 3 to our consolidated financial statements). The exchange ratio was calculated
according to a formula determined by the parties, and applied to all series of
EZchips shares without regard to any preferences of such shares. On December 22,
2006, we issued 3,521,566 of our ordinary shares to funds affiliated with two of the major
shareholders, Star Ventures and BlueRunVentures(formerly known as Nokia
Venture Partners), in exchange for their shares of EZchip. On January 22, 2008, we issued
5,011,841 of our ordinary shares to funds affiliated with the other two major
shareholders, JK&B Capital and The Goldman Sachs Group, in exchange for their shares
of EZchip.

Financing.           In
July 2005, The Goldman Sachs Group, Inc., JK&B Capital and their           respective
affiliates invested an aggregate of $1.8 million in our EZchip           subsidiary in
exchange for preferred shares of EZchip. These preferred shares           were included
in the EZchip shares exchanged on January 22, 2008, as described           above under
Exchange Right Agreement.

Directors
and Observers. Until December 3, 2007, Mr. Robert Humes, a Member of JK&B Capital
L.L.C., served as director of EZchip, and Ms. Constance Capone, a Member of JK&B
Capital L.L.C., served as director of our subsidiary EZchip Inc. and as an observer to the
board of directors of EZchip. Mr. Humes and Ms. Capone were appointed to such positions
pursuant to appointment rights granted under EZchips articles of association. On
December 3, 2007, Mr. Humes and Ms. Capone resigned from such positions.

49

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Until
December 5, 2007, Ms. Julia Feldman, a Vice President of Goldman, Sachs & Co., served
as an observer to the board of directors of our subsidiary EZchip. Ms. Feldman was
appointed to such position pursuant to appointment rights granted under EZchips
articles of association. On December 5, 2007, Ms. Feldman resigned from such position.

Repurchase
of EZchip Shares. During 2007, we purchased from employees and former employees of
EZchip an aggregate of approximately 4,374,458 EZchip ordinary shares which had been
issued upon exercise of employee stock options for a net aggregate amount of approximately
$14.2 million, including 1,306,903 EZchip ordinary shares from our directors and executive
officers.

|C. | INTERESTS
OF EXPERTS AND COUNSEL
|-- | --------------------------------

Not
applicable.

|ITEM 8. | FINANCIAL
INFORMATION
|------- | ---------------------

|A. | CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
|-- | -------------------------------------------------------

# Consolidated Financial
Statements

See
the financial statements included under Item 18 Financial Statements.

# Export Sales

See Note
17b to the financial statements.

# 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. Any future dividend
policy will be determined by our Board of Directors and will be based upon conditions then
existing, including our results of operations, financial condition, current and
anticipated cash needs, contractual restrictions and other conditions. In addition, our
articles of association provide that the declaration of a dividend requires approval by an
ordinary resolution of our shareholders, which may decrease but not increase the amount
proposed by the Board of Directors.

According
to the Israeli Companies Law, a company may distribute dividends out of its profits
provided that there is no reasonable concern that such dividend distribution will prevent
the company from paying all its current and foreseeable obligations, as they become due.
Notwithstanding the foregoing, dividends may be paid with the approval of a court,
provided that there is no reasonable concern that such dividend distribution will prevent
the company from satisfying its current and foreseeable obligations, as they become due.
Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings
or earnings accumulated during the preceding two years, after deducting previous
distributions that were not deducted from the surpluses. In the event cash dividends are
declared, such dividends will be paid in NIS.

50

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|B. | SIGNIFICANT
CHANGES
|-- | -------------------

Except
as otherwise disclosed in this Annual Report, there has been no material change in our
financial position since December 31, 2007.

|ITEM 9. | THE OFFER AND LISTING
|------- | ---------------------

|A. | OFFER
AND LISTING DETAILS
|-- | -------------------------

Our
ordinary shares were listed on the NASDAQ Global Market under the symbol LNOP
from our initial public offering in November 1992 until April 14, 2003, at which date the
listing of our ordinary shares was transferred to the NASDAQ Capital Market. Since January
4, 2008, our ordinary shares have been listed once again on the NASDAQ Global Market and
on January 17, 2008 our NASDAQ symbol changed to EZCH. Since April 1, 2002,
our ordinary shares have also been traded on the Tel Aviv Stock Exchange.

Set
forth below for each of the periods indicated are the range of high and low market prices
of our ordinary shares as reported by the NASDAQ Global Market (for periods from January
4, 2008) and the NASDAQ Capital Market (for periods prior to January 4, 2008), and the
high and low market prices of our ordinary shares (in U.S. dollars) as reported by the Tel
Aviv Stock Exchange. Share prices on the Tel Aviv Stock Exchange are quoted in New Israeli
Shekels (NIS); the share 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.

# Annual Share Price
Information

The
following table sets forth, for each of the years indicated, the high and low market
prices of our ordinary shares on the NASDAQ Capital Market and the Tel Aviv Stock
Exchange:

|     | NASDAQ | Tel Aviv Stock Exchange
|---- | ------ | -----------------------
|
|
|
|
|2003 |        |                        
|2004 |        |                        
|2005 |        |                        
|2006 |        |                        
|2007 |        |                        

# Quarterly Share Price
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
Capital Market and the Tel-Aviv Stock Exchange:

|               | NASDAQ | Tel Aviv Stock Exchange
|-------------- | ------ | -----------------------
|
|
|
|
|2006           |        |                        
|First quarter  |        |                        
|Second quarter |        |                        
|Third quarter  |        |                        
|Fourth quarter |        |                        
|               |        |                        
|2007           |        |                        
|First quarter  |        |                        
|Second quarter |        |                        
|Third quarter  |        |                        
|Fourth quarter |        |                        

51

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# Monthly Share Price
Information

The
following table sets forth, for the most recent six months, the high and low market prices
of our ordinary shares on the NASDAQ Global Market (for periods from January 4, 2008) and
the NASDAQ Capital Market (for periods prior to January 4, 2008) and the Tel Aviv Stock
Exchange:

|                                    | NASDAQ | Tel Aviv Stock Exchange
|----------------------------------- | ------ | -----------------------
|
|
|
|
|October 2007                        |        |                        
|November 2007                       |        |                        
|December 2007                       |        |                        
|January 2008                        |        |                        
|February 2008                       |        |                        
|March 2008 (through March 27, 2008) |        |                        

|B. | PLAN
OF DISTRIBUTION
|-- | --------------------

Not
applicable

|C. | MARKETS
|-- | -------

See
Item 9A. The Offer and Listing  Offer and Listing Details.

|D. | SELLING
SHAREHOLDERS
|-- | --------------------

Not
applicable.

|E. | DILUTION
|-- | --------

Not
applicable.

|F. | EXPENSE
OF THE ISSUE
|-- | --------------------

Not
applicable.

|ITEM 10. | ADDITIONAL INFORMATION
|-------- | ----------------------

|A. | SHARE
CAPITAL
|-- | -------------

Not
applicable.

|B. | MEMORANDUM
AND ARTICLES OF ASSOCIATION
|-- | --------------------------------------

# Purposes and Objects 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 6B. Directors, Senior Management
and Employees  Board Practices  Fiduciary Duties; 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.

52

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# Rights Attached to
Ordinary Shares

Our
authorized share capital consists of 50,000,000 ordinary shares, par value NIS 0.02 per
share. All outstanding ordinary shares are validly issued and fully paid. Certain rights
attached to the ordinary shares are as described below.

Voting
Rights. 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.

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.

Under
our articles of association, most decisions may be approved 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.

Dividend
and Liquidation Rights; Rights to Shares in our Companys Profits.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. Our shareholders have the right to share in our profits distributed as a
dividend and any other permitted distribution, if any.

# Changing Rights Attached
to Shares

According
to our articles of association, 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.

# 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.
Depending on the matter to be voted upon, notice of at least 21 days or 35 days prior to
the date of the meeting is required. A special meeting may be convened by request of two
directors, one quarter of the directors in office, 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.

53

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# 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:

| |  | there
is a limitation on acquisition of any level of control of the company; or
| | - | -------------------------------------------------------------------------------

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

The
Israeli Companies Law requires the parties to a proposed merger to file a merger
proposal with the Israeli Registrar of Companies, specifying certain terms of the
transaction. Each merging companys board of directors and shareholders must approve
the merger. Shares in one of the merging companies held by the other merging company or
certain of its affiliates are disenfranchised for purposes of voting on the merger. A
merging company must inform its creditors of the proposed merger. Any creditor of a party
to the merger may seek a court order blocking the merger, if there is a reasonable concern
that the surviving company will not be able to satisfy all of the obligations of the
parties to the merger. Moreover, a merger may not be completed until at least 50 days
have passed from the time that the merger proposal was filed with the Israeli Registrar of
Companies and at least 30 days have passed from the approval of the shareholders of
each of the merging companies.

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.

|C. | MATERIAL
CONTRACTS
|-- | ------------------

None.

|D. | 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.

54

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|E. | TAXATION
|-- | --------

# ISRAELI TAX
CONSIDERATIONS, FOREIGN EXCHANGE REGULATION AND INVESTMENT PROGRAMS

The
following is a summary of the principal Israeli tax laws applicable to us, of the Israeli
Government programs from which we benefit, and of Israeli foreign exchange regulations.
This section also contains a discussion of material Israeli tax consequences to our
shareholders who are not residents or citizens of Israel. This summary does not discuss
all aspects of Israeli tax law that may be relevant to a particular investor in light of
his or her personal investment circumstances, or to some types of investors subject to
special treatment under Israeli law. Examples of investors subject to special treatment
under Israeli law include residents of Israel, traders in securities, or persons who own,
directly or indirectly, 10% or more of our outstanding voting capital, all of whom are
subject to special tax regimes not covered in this discussion. Some parts of this
discussion are based on new tax legislation that has not been subject to judicial or
administrative interpretation. The discussion should not be construed as legal or
professional tax advice and does not cover all possible tax consequences.

You
are urged to consult your own tax advisor as to the Israeli and other tax consequences of
the purchase, ownership and disposition of our ordinary shares, including, in particular,
the effect of any non-Israeli, state or local taxes.

# General corporate tax
structure in Israel

Israeli
companies were generally subject to corporate tax at the rate of 29% of their taxable
income in 2007. Pursuant to tax reform legislation that came into effect in 2003, the
corporate tax rate is to undergo further staged reductions to 25% by the year 2010. In
order to implement these reductions, the corporate tax rate is scheduled to decline to 27%
in 2008, and 26% in 2009.

However,
as discussed below, the rate is effectively reduced for income derived from an Approved
Enterprise and Privileged Enterprise.

# Law for the
Encouragement of Capital Investments, 1959

EZchips
facilities in Israel have been granted Approved Enterprise status under the Law for the
Encouragement of Capital Investments, 1959, commonly referred to as the Investment
Law. The Investment Law provides that capital investments in a production facility
(or other eligible assets) may be designated as an Approved Enterprise and Privileged
Enterprise. Until 2005, the designation required advance approval from the Investment
Center of the Israel Ministry of Industry, Trade and Labor. Each certificate of approval
for an Approved Enterprise relates to a specific investment program, delineated both by
the financial scope of the investment and by the physical characteristics of the facility
or the asset.

Under
the Approved Enterprise program, a company is eligible for governmental grants. The tax
benefits under such program are generally limited to 12 years from commencement of
production or 14 years from the date of the approval, whichever is earlier. A company may
elect to receive an alternative package comprised of tax benefits, referred to as the
Alternative Track, rather than grants. Under the Alternative Track, a companys
undistributed income derived from an Approved Enterprise is exempt from corporate tax for
an initial period (two to ten years, depending on the geographic location of the Approved
Enterprise within Israel). The exemption begins in the first year that the company
realizes taxable income from the Approved Enterprise. There is no year limitation to the
Alternative Track. As of December 31, 2007, we had not generated any income under the
provisions of the Investment Law.

On
April 1, 2005, an amendment to the Investment Law came into effect. The amendment revised
the criteria for investments qualified to receive tax benefits. An eligible investment
program under the amendment will qualify for benefits as a Privileged Enterprise (rather
than the previous terminology of Approved Enterprise). Among other things, the amendment
provides tax benefits to both local and foreign investors and simplifies the approval
process. The period of tax benefits for a new Privileged Enterprise commences in the
Year of Commencement. This year is the later of (1) the year in which taxable
income is first generated by a company, or (2) a year selected by the company for
commencement, on the condition that the company meets certain provisions provided by the
Investment Law, referred to as the Year of Election. The amendment does not apply to
investment programs approved prior to December 31, 2004, and applies to new investment
programs only. Therefore, our Approved Enterprises are not subject to the provisions of
the amendment.

55

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Tax
benefits are available under the amendment to production facilities (or other eligible
facilities), which are generally required to derive more than 25% of their business income
from export. In order to receive the tax benefits, the amendment states that the company
must make an investment in the Privileged Enterprise exceeding a certain percentage or a
minimum amount specified in the Investment Law. Such investment may be made over a period
of no more than three years ending at the end of the year in which the company requested
to have the tax benefits apply to the Privileged Enterprise, referred to as the (the Year
of Election). Where the company requests to have the tax benefits apply to an expansion of
existing facilities, then only the expansion will be considered a Privileged Enterprise
and the companys effective tax rate will be the result of a weighted combination of
the applicable rates. In this case, the minimum investment required in order to qualify as
a Privileged Enterprise is required to exceed a certain percentage or a minimum amount of
the companys production assets before the expansion.

The
duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from
the Year of Commencement, or 12 years from the first day of the Year of Election. The tax
benefits granted to a Privileged Enterprise are determined according to one of the
following tax routes:

| |  | Similar
to the currently available Alternative Track for an Approved Enterprise program,
exemption from corporate tax on undistributed income for a period of two to ten years,
depending on the geographic location of the Privileged Enterprise within Israel, and a
reduced corporate tax rate of 10% to 25% for the remainder of the benefits period,
depending on the level of foreign investment in each year. Benefits may be granted for a
term of seven to ten years, depending on the level of foreign investment in the company.
If the company pays a dividend out of income derived from the Privileged Enterprise
during the tax exemption period, such income will be subject to corporate tax at the
applicable rate (10%-25%) in respect of the gross amount of the dividend that we may
distribute. The company is required to withhold tax at the source at a rate of 15% from
any dividends distributed from income derived from the Privileged Enterprise; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
special tax route, which enables companies owning facilities in certain geographical
locations in Israel to pay corporate tax at the rate of 11.5% on income of the Privileged
Enterprise. The benefits period is ten years. Upon payment of dividends, the company is
required to withhold tax at source at a rate of 15% for Israeli residents and at a rate
of 4% for foreign residents.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
amendment will apply to approved enterprise programs in which the Year of Election under
the Investment Law is 2004 or later, unless such programs received approval from the
Investment Center on or prior to December 31, 2004, in which case the amendment provides
that terms and benefits included in any certificate of approval already granted will
remain subject to the provisions of the law as they were on the date of such approval.

If
a company distributes dividends from tax-exempt Approved/Privileged Enterprise income, the
company will be taxed on the otherwise exempt income at the same corporate tax rate that
applies to it.

Currently
we have one Approved Enterprise program under the Investment Law. The Approved Enterprise
is under the alternative benefits program and in this case, the tax benefits period for
this program has not yet begun. Income derived from this alternative benefit program is
exempt from tax for a period of ten years, starting in the first year in which we generate
taxable income from the approved enterprise, subject to certain conditions.As
mentioned above the years limitation does not apply to the exemption period. In
addition, during 2006 EZchip applied to the tax authorities to qualify for benefits as a
Privileged Enterprise under the Investment Law, as amended, with 2006 as the election year
for the program. We and EZchip intend to continue to elect our investments in productive
assets as Privileged Enterprise programs, but we cannot assure you that we will do so or
that we will be successful. We intend to reinvest the entire amount of our tax-exempt
income and not to distribute this income as a dividend.

56

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The
benefits available to an Approved/Privileged Enterprise are conditioned upon terms
stipulated in the Investment Law and the related regulations (which include making
specified investments in property and equipment, and financing a percentage of these
investments with share capital), and the criteria set forth in the applicable certificate
of approval. If EZchip does not fulfill these conditions in whole or in part, the benefits
can be cancelled and it may be required to refund the amount of the benefits, linked to
the Israeli consumer price index plus interest. We believe that EZchips Approved
Enterprise program currently operates in compliance with all applicable conditions and
criteria, but we cannot assure you that they will continue to do so.

As
a result of the amendment to the Investment Law in April 2005, tax-exempt income generated
under the provisions of the amended law will subject us to taxes upon distribution or
liquidation and we may be required to record deferred tax liability with respect to such
tax-exempt income. As of December 31, 2007, we had not generated any income under the
provisions of the new law.

# Law for Encouragement of
Research and Development in the Industry, 1984

Since
April 2006, our research and development efforts have been financed, in part, through
grants from the Office of the Chief Scientist, or the OCS, under our approved plans in
accordance with the Israeli Law for Encouragement of Research and Development in the
Industry, 1984, or the R&D Law. Through December 31, 2007, we had applied and received
approval for grants totaling $2.6 million from the OCS. Under Israeli law and the
approved plans, royalties on the revenues derived from sales of any of our products,
incorporating OCS funded know-how (including ancillary services) are payable to the
Israeli government, generally at the rate of 4.0% during the first three years and 4.5%
beginning with the fourth year, up to the amount of the received grants as adjusted for
fluctuation in the U.S. dollar/NIS exchange rate. The grants also bear interest equal
to the 12-month London Interbank Offered Rate applicable to dollar deposits that is
published on the first business day of each calendar year. Royalties are paid on our
consolidated revenues.

The
government of Israel does not own proprietary rights in knowledge developed using its
funding and there is no restriction related to such funding on the export of products
manufactured using the know-how. The know-how is, however, subject to other legal
restrictions, including the obligation to manufacture the product based on the know-how in
Israel and to obtain the OCSs consent to transfer the know-how to a third party,
whether in or outside Israel. These restrictions may impair our ability to outsource
manufacturing or enter into similar arrangements for those products or technologies and
they continue to apply even after we have paid the full amount of royalties payable for
the grants.

The
R&D Law provides that the consent of the OCS for the transfer outside of Israel of
know-how derived out of an approved plan may only be granted under special circumstances
and subject to fulfillment of certain conditions specified in the R&D Law as follows:

| |  | the
grant recipient pays to the OCS a portion of the sale price paid in consideration for
such OCS-funded know-how (according to certain formulas), except if the grantee receives
from the transferee of the know-how an exclusive, irrevocable, perpetual unlimited
license to fully utilize the know-how and all related rights;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
grant recipient receives know-how from a third party in exchange for its OCS funded
              know-how; or
| | - | ------------------------------------------------------------------------------------------------------------------

| |  | such
transfer of OCS funded know-how arises in connection with certain types of cooperation in
research and development activities.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

As
of December 31, 2007, we had an outstanding contingent obligation to pay royalties in the
amount of approximately $2.6 million.

# Law for the
Encouragement of Industry (Taxes), 1969

We
believe that EZchip currently qualifies as an Industrial Company within the meaning of the
Law for the Encouragement of Industry (Taxes), 1969 (the Industrial Encouragement Law).
The Industrial Encouragement Law defines an Industrial Company as a company that is
resident in Israel and that derives at least 90% of its income in any tax year, other than
income from defense loans, capital gains, interest and dividends, from an enterprise whose
major activity in a given tax year is industrial production.

57

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The
following are the principal corporate tax benefits that are available to Industrial
Companies:

| |  | amortization
of the cost of purchased know-how and patents over an eight-year period for tax
              purposes,
| | - | --------------------------------------------------------------------------------------------------------------------

| |  | accelerated
depreciation rates on equipment and buildings,
| | - | ----------------------------------------------------------

| |  | under
specified conditions, an election to file consolidated tax returns with related Israeli
              Industrial Companies, and
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| |  | expenses
related to a public offering are deductible in equal amounts over three years.
| | - | ---------------------------------------------------------------------------------------

Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority. We cannot assure you that we qualify or will
continue to qualify as an Industrial Company or that the benefits described above will be
available in the future.

# Special provisions
relating to taxation under inflationary conditions

We
are subject to the Income Tax Law (Inflationary Adjustments), 1985, generally referred to
as the Inflationary Adjustments Law. The Inflationary Adjustments Law is highly complex
and represents an attempt to overcome the problems presented to a traditional tax system
by an economy undergoing rapid inflation. Its features, which are material to us, are
summarized as follows:

| |  | Where
a companys equity, as calculated under the Inflationary Adjustments Law, exceeds
the depreciated cost of its fixed assets (as defined in the Inflationary Adjustments
Law), a deduction from taxable income is permitted equal to the excess multiplied by the
applicable annual rate of inflation. The maximum deduction permitted in any single tax
year is 70% of taxable income, with the unused portion permitted to be carried forward,
linked to the Israeli consumer price index. The unused portion that was carried forward
may be deductible in full in the following year.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Where
a companys depreciated cost of fixed assets exceeds its equity, then the excess
multiplied by the applicable annual rate of inflation is added to taxable income,
referred to as the inflation supplement. The inflation supplement will only be added to
the corporate income but not to other incomes such as capital gains.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Subject
to specified limitations, depreciation deductions on fixed assets and losses carried
forward are adjusted for inflation based on the change in the consumer price index.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
the event that the Israeli consumer price index did not rise in a particular year by 3.0%,
then the Israeli government may decide that some or all of the provisions of the
Inflationary Adjustments Law shall not apply with respect to such fiscal year, or that the
rate of increase of the Israeli consumer price index relating to such fiscal year shall be
deemed to be 0%, and to make the adjustments required to be made as a result of such
determination.

On
February 26, 2008, the Israeli Parliament (the Knesset) enacted the Income Tax Law
(Inflationary Adjustments) (Amendment No. 20) (Restriction of Effective Period), 2008,
which we refer to as the Inflationary Adjustments Amendment. In accordance with the
Inflationary Adjustments Amendment, the effective period of the Inflationary Adjustments
Law will cease at the end of the 2007 tax year and as of the 2008 tax year the provisions
of the law shall no longer apply, other than the transitional provisions intended at
preventing distortions in the tax calculations. In accordance with the Inflationary
Adjustments Amendment, commencing the 2008 tax year, income for tax purposes will no
longer be adjusted to a real (net of inflation) measurement basis. Furthermore, the
depreciation of inflation immune assets and carried forward tax losses will no longer be
linked to the Israeli consumer price index.

58

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# Taxation of shareholders
on receipt of dividends

Taxation of Non-Israeli
Shareholders

Under
Israeli tax law, a distribution of dividends from income attributable to an
Approved/Privileged Enterprise will be subject to tax in Israel at the rate of 15%, which
is withheld and paid by the company paying the dividend, if the dividend is distributed
during the benefits period or within the following 12 years (but the 12-year limitation
does not apply to a Foreign Investors Company). Any distribution of dividends from income
that is not attributable to an Approved/Privileged Enterprise will be subject to tax in
Israel at the rate of 25%, except that dividends distributed on or after January 1, 2006
to an individual who is deemed a non-substantial shareholder are subject to
tax at the rate of 20%.

Under
the United States-Israel tax treaty, the maximum tax on dividends paid to a holder of the
ordinary shares who is a United States resident is 25%. Dividends received by a United
States company that holds at least 10% of our voting rights will be subject to withholding
tax at the rate of 12.5%, provided certain other conditions in the tax treaty are met (or
at the tax rate of 15% in respect of dividends paid from income attributable to our
Approved Enterprises).

Taxation of Israeli
Shareholders

Israeli
resident individuals are generally subject to Israeli income tax on the receipt of
dividends paid on our ordinary shares, other than bonus shares (share dividends) or stock
dividends, at the rate of 20%, or 25% for a shareholder that is considered a material
shareholder (within the meaning of the Israeli Income Tax Ordinance) at any time during
the 12-month period preceding such distribution. Dividends paid on our ordinary shares to
Israeli companies are exempt from such tax, except for dividends distributed from income
derived outside of Israel, which are subject to the 25% tax rate.

Dividends
paid from income derived from attributable to an Approved/Privileged Enterprise are
subject to tax, which is withheld at the source, at the rate of 15%, although we cannot
assure you that we will designate the profits that are being distributed in a way that
will reduce shareholders tax liability to this tax rate.

Capital gains taxes
applicable to non-Israeli shareholders

Capital
gains from the sale of our ordinary shares by non-Israeli shareholders are exempt from
Israeli taxation, provided that the capital gain is not derived from a permanent
establishment in Israel. In addition, the United States-Israel tax treaty exempts United
States residents who hold less than 10% of our voting rights, and who held less than 10%
of our voting rights during the 12 months prior to a sale of their shares, from Israeli
capital gains tax in connection with such sale.

Foreign exchange
regulations

Dividends,
if any, paid to the holders of our ordinary shares, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of
our ordinary shares to an Israeli resident, may be paid in non-Israeli currency. If these
amounts are paid in Israeli currency, they may be converted into freely repatriable U.S.
dollar at the rate of exchange prevailing at the time of conversion. In addition, the
statutory framework for the potential imposition of exchange controls has not been
eliminated, and may be restored at any time by administrative action.

# 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 and tax-exempt organizations, (c) U.S. Shareholders
owning, directly or by attribution, 10% or more of 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.

59

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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

Subject
to the discussion of the passive foreign investment company rules below, 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 category income or, in the case of certain U.S. Shareholders, general
category income for the purpose of computing a U.S. Shareholders foreign tax credit
limitations for U.S. foreign tax credit purposes. Further, there are special rules for
computing the foreign tax credit limitation of a taxpayer who receives dividends subject
to a reduced tax rate, 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.

60

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Subject
to certain limitations, qualified dividend income received by a noncorporate
U.S. Holder in tax years beginning on or before December 31, 2010 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

Subject
to the discussion of the passive foreign investment company rules below, 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 Treaty, 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.

# Passive Foreign
Investment Company Status

For
U.S. federal income tax purposes, a foreign corporation will be classified as a passive
foreign investment company, or 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 passive
assets 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.

61

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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 able to
          make a qualified electing fund election unless we comply with certain
applicable           information reporting requirements.

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. Gain or loss from the
disposition of ordinary shares (as to which a           mark-to-market election
was made) in a year in which we are no           longer a PFIC, will be capital gain or
loss. 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.

62

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# 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.

|F. | DIVIDEND
AND PAYING AGENTS
|-- | --------------------------

Not
applicable.

|G. | STATEMENT
BY EXPERTS
|-- | --------------------

Not
applicable.

|H. | DOCUMENTS
ON DISPLAY
|-- | --------------------

We
are subject to certain of the information reporting requirements of the Securities and
Exchange Act of 1934, as amended. As a foreign private issuer, we 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 file with the Securities and Exchange Commission an annual report on Form
20-F containing financial statements audited by an independent accounting firm. We also
furnish reports on Form 6-K containing unaudited financial information after the end of
each of the first three quarters. 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.

This
report and other information filed or to be filed by us can be inspected and copied at the
public reference facilities maintained by the Securities and Exchange Commission at:

| | 100
F Street, NE
| | ----------------

| | Public
Reference Room
| | ---------------------

| | Washington,
D.C. 20549
| | ----------------------

Copies
of these materials can also be obtained from the Public Reference Section of the
Securities and Exchange Commission, 100 F Street, NE, Washington, D.C. 20549, at
prescribed rates.

The
Securities and Exchange Commission maintains a Web site at www.sec.gov that contains
reports, proxy and information statements, and other information regarding registrants
that make electronic filings with the Securities and Exchange Commission using its EDGAR
system.

|I. | SUBSIDIARY
INFORMATION
|-- | ----------------------

Not
applicable.

|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.

63

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# 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.

# 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 derived from Corporate bonds, rated A-AAA and bearing annual interest
rates in the range of 3%  5%, with maturities in the range of 1 to 4 years; and (ii)
short term managed liquidity funds bearing annual interest rates in the range of 3.0%
 4.0%.

|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- | ------------------------------------------------------

Not
applicable.

# PART II

|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- | -----------------------------------------------

None

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

Not
applicable.

|ITEM 15. | CONTROLS AND PROCEDURES
|-------- | -----------------------

# Disclosure Controls and
Procedures

Our
principal executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended) as of December 31, 2007, have
concluded that, as of such date, our disclosure controls and procedures were effective and
ensured that information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act is accumulated and communicated to our management,
including our principal executive officer and chief financial officer, to allow timely
decisions regarding required disclosure and is recorded, processed, summarized and
reported within the time periods specified by the rules of the Securities and Exchange
Commission.

# Managements Annual
Report on Internal Control over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal control over
our financial reporting. Internal control over financial reporting is defined in Rule
13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the companys principal executive and
principal financial officers and effected by the companys board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles and includes those policies
and procedures that:

| |  | Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect
              the transaction and dispositions of the assets of the company;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

64

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

| |  | Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use of disposition of the companys assets that could have a material
effect on the financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. 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.

Our
management assessed the effectiveness of our internal control over financial reporting, as
of December 31, 2007. In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.

Based
on that assessment, our management concluded that as of December 31, 2007,  our
internal control over financial reporting is effective.

Our
independent auditors, Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global, have issued an audit report on the effectiveness of our internal control over
financial reporting. The report is included in page F-3 of this Annual Report on Form
20-F.

# Changes in Internal
Control over Financial Reporting

During
the period covered by this Annual Report on Form 20-F, no changes in our internal control
over financial reporting have occurred that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.

|ITEM 16. | [RESERVED]
|-------- | ----------

|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- | --------------------------------

Our
Board of Directors has determined that Karen Sarid meets the definition of an audit
committee financial expert, as defined by rules of the Securities and Exchange Commission.

|ITEM 16B. | CODE OF ETHICS
|--------- | --------------

We
have adopted a code of ethics that applies to our principal 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. We undertake to
provide without charge, upon request, written copies of the code of ethics. Requests
should be addressed to LanOptics Ltd., 1 Hatamar Street, P.O. Box 527, Yokneam 20692,
Israel, Attention: Investor Relations. 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. The
code of ethics has been posted on our website at.
http://www.ezchip.com/Images/pdf/LanOptics_EZchip_Code_of_Business_Conduct_and_Ethics.pdf

65

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|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- | --------------------------------------

# Fees Paid To Independent
Public Accountants

The following table sets forth the
fees billed by our independent registered public accountant firm for professional services
rendered during each of the years indicated. All of such fees were pre-approved by our
Audit Committee.

| |                        | Year ended December 31,
| | ---------------------- | -----------------------
|
|
|
|
| | Audit fees (1)         |                        
| | Audit-related fees (2) |                        
| | Tax fees (3)           |                        
| |                        |                        
| | Total                  |                        

---

| | (1)
                      Audit fees are for audit services for each of the years shown in
the table,                     including fees associated with the annual audit (including
audit of our internal                     control over financial reporting) and reviews
of our quarterly financial results                     submitted to the Securities and
Exchange Commission on Form 6-K, consultations                     on various accounting
issues and audit services provided in connection with                     other statutory
or regulatory filings.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2)
               Audit-related fees are related to a comfort letter provided to investors,
review                of registration statements filed with the Securities and Exchange
Commission,                accounting consultation and audits in connection with our
applications to the                Office of the Chief Scientist.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3)
               Tax fees are for professional services rendered by our auditors for tax
               compliance, tax planning and tax advice on actual or contemplated
transactions,                tax consulting associated to international taxation and
employee benefits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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 require 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 REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEES
|--------- | ---------------------------------------------------------------------------

Not
applicable.

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

# Issuer Purchase of
Equity Securities

There
were no ordinary shares of LanOptics purchased by us or on our behalf or by any affiliated
purchaser during 2007.

# PART III

|ITEM 17. | FINANCIAL STATEMENTS
|-------- | --------------------

Not
applicable.

66

---

---

|ITEM 18. | FINANCIAL STATEMENTS
|-------- | --------------------

See
pages F-1 to F-47 of this annual report.

|ITEM 19. | EXHIBITS
|-------- | --------

|Exhibit No. | Description of Exhibit
|----------- | ----------------------

|1.1 | Memorandum
of Association of the Registrant (1)
|--- | -----------------------------------------------

|1.2 | Amended
and Restated Articles of Association of the Registrant
|--- | --------------------------------------------------------------

|4.1 | Ordinary
Share Purchase Agreement dated June 22, 2005 among the Registrant and the
                             Investors therein (2)
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|4.2 | LanOptics
Ltd. 2003 Amended and Restated Equity Incentive Plan (3)
|--- | ------------------------------------------------------------------

|4.3 | LanOptics
Ltd. 2007 U.S. Equity Incentive Plan (4)
|--- | --------------------------------------------------

|4.4 | Ordinary
 Share Purchase  Agreement  dated August 20, 2007 by and between the Registrant and
                             Mr. J. Cheney (5)
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|4.5 | Ordinary
Share Purchase  Agreement dated September 3, 2007 by and between the Registrant and
                             Mr. J. Cheney (6)
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|4.6 | Ordinary
Share Purchase  Agreement dated September 9, 2007 by and between the Registrant and
                             Mr. J. Cheney (7)
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|8.1 | List
of Subsidiaries
|--- | --------------------

|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 to18 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 to18 U.S.C. 1350, as adopted pursuant to
                             Section 906 of the Sarbanes-Oxley Act of 2002
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

---

|(1) | Filed
as Exhibit 3.1 to the Registrants Registration Statement on Form
               F-1, registration number 33-52676, and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Filed
as Exhibit 4.3 to Amendment No. 3 of the Registrants Registration
               Statement on Form F-3, registration number 333-126416 and incorporated
herein by                reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Filed
as Exhibit 4.2 to the Registrants Annual Report on Form 20-F for the
               year ended December 31, 2006 and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Filed
as Exhibit to the Registrants Form 6-K, dated December 3, 2007, and
               incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(5) | Filed
as Exhibit to the Registrants Form 6-K, dated August 21, 2007, and
               incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------

|(6) | Filed
as Exhibit to the Registrants Form 6-K, dated September 4, 2007, and
               incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(7) | Filed
as Exhibit to the Registrants Form 6-K, dated September 10, 2007,
               and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------

67

---

---

LANOPTICS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2007

IN U.S. DOLLARS

INDEX

|                                                           |            
|---------------------------------------------------------- | -----------
|                                                           | Page       
|                                                           |            
|                                                           |            
|Reports of Independent Registered Public Accounting Firm   | F-2 - F-3  
|                                                           |            
|Consolidated Balance Sheets                                | F-4 - F-5  
|                                                           |            
|Consolidated Statements of Operations                      | F-6        
|                                                           |            
|Statements of Changes in Shareholders Equity (Deficiency) | F-7        
|                                                           |            
|Consolidated Statements of Cash Flows                      | F-8 - F-10 
|                                                           |            
|Notes to Consolidated Financial Statements                 | F-11 - F-47

F-1

---

---



(ERNST & YOUNG LOGO)

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Shareholders and Board of Directors of

LANOPTICS LTD.

We
have audited the accompanying consolidated balance sheets of LanOptics Ltd.
(the Company) and its subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations, changes in shareholders equity
(deficiency) and cash flows for each of the three years in the period ended
December 31, 2007. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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 as of December 31, 2007 and 2006, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.

As
discussed in Notes 2p and 2n to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standard
No. 123(R), Share-Based Payment and the provisions of Statement of Financial
Accounting Standard Interpretation No. 48 Accounting for Uncertainty In Income
Taxes, effective January 1, 2006 and 2007, respectively.

We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company and subsidiaries
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 27, 2008 expressed an unqualified opinion thereon.

|               |                                                             
|-------------- | ------------------------------------------------------------
|Haifa, Israel  | /s/ Kost Forer Gabbay & KasiererKOST FORER GABBAY & KASIERER
|March 27, 2008 | A Member of Ernst & Young Global                            

F-2

---

---



(ERNST & YOUNG LOGO)

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Shareholders and Board of Directors of

LANOPTICS LTD.

We
have audited LanOptics Ltd (the Company) and its subsidiaries internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Companys
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying managements
report on internal control over financial reporting. Our responsibility is to
express an opinion on the Companys internal control over financial reporting
based on our audit.

We
conducted our audit 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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A
Companys internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A Companys internal control
over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
Company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Companys assets that could have a material effect on the financial
statements.

Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. 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.

In
our opinion, the Company and its subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December
31, 2007, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company and its subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations, changes in shareholders equity
(deficiency) and cash flows for each of the three years in the period ended
December 31, 2007 and our report dated March 27, 2008 expressed an unqualified
opinion thereon.

|               |                                                             
|-------------- | ------------------------------------------------------------
|Haifa, Israel  | /s/ Kost Forer Gabbay & KasiererKOST FORER GABBAY & KASIERER
|March 27, 2008 | A Member of Ernst & Young Global                            

F-3

---

---



|                                   
|-----------------------------------
|LANOPTICS LTD. AND ITS SUBSIDIARIES
|                                   
|CONSOLIDATED BALANCE SHEETS        
|                                   
|U.S. dollars in thousands          

|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|---------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | ------------ | - | ------- |  | - | ------ | 
|                                                                                                                             |  |      |    | December 31, |  
|                                                                                                                             |  |      |    |              |  
|                                                                                                                             |  | Note |    | 2007         |   | 2006    | 
|                                                                                                                             |  |      |    |              |   |         | 
|                                                                                                                             |  |      |    |              |   |         | 
|ASSETS                                                                                                                       |  |      |    |              |   |         |  |   |        | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|CURRENT ASSETS:                                                                                                              |  |      |    |              |   |         |  |   |        | 
|Cash and cash equivalents                                                                                                    |  |      |    |              | $ | 31,472  |  | $ | 12,186 | 
|Marketable securities                                                                                                        |  |      | 4  |              |   | 11,156  |  |   | 5,472  | 
|Trade receivables (net of allowance for
  doubtful accounts of $40 and $48 as of December 31, 2007 and 2006,
  respectively) |  |      |    |              |   | 2,877   |  |   | 1,706  | 
|Other accounts receivable and prepaid
  expenses                                                                             |  |      | 5  |              |   | 1,180   |  |   | 683    | 
|Inventories                                                                                                                  |  |      | 6  |              |   | 3,109   |  |   | 3,489  | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|Total current assets                                                                                                         |  |      |    |              |   | 49,794  |  |   | 23,536 | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|LONG-TERM INVESTMENTS:                                                                                                       |  |      |    |              |   |         |  |   |        | 
|Prepaid development and production costs,
  net                                                                              |  |      | 7  |              |   | 148     |  |   | 290    | 
|Severance pay fund                                                                                                           |  |      |    |              |   | 2,640   |  |   | 1,951  | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|Total long-term investments                                                                                                  |  |      |    |              |   | 2,788   |  |   | 2,241  | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|PROPERTY AND EQUIPMENT, NET                                                                                                  |  |      | 8  |              |   | 394     |  |   | 352    | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|INTANGIBLE ASSETS, NET                                                                                                       |  |      | 9  |              |   | 2,736   |  |   | 3,633  | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|GOODWILL                                                                                                                     |  |      | 10 |              |   | 49,533  |  |   | 36,531 | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 
|Total assets                                                                                                                 |  |      |    |              | $ | 105,245 |  | $ | 66,293 | 
|                                                                                                                             |  |      |    |              |   |         |  |   |        | 

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

F-4

---

---



|                                             
|---------------------------------------------
|LANOPTICS LTD. AND ITS SUBSIDIARIES          
|                                             
|CONSOLIDATED BALANCE SHEETS                  
|                                             
|U.S. dollars in thousands (except share data)

|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ---- | ----- | ------------ | - | ------- | - | - | ------- | -
|                                                                                                       |  |      |       | December 31, |  
|                                                                                                       |  |      |       |              |  
|                                                                                                       |  | Note |       | 2007         |   | 2006    |  
|                                                                                                       |  |      |       |              |   |         |  
|                                                                                                       |  |      |       |              |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                   |  |      |       |              |   |         |   |   |         |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|CURRENT LIABILITIES:                                                                                   |  |      |       |              |   |         |   |   |         |  
|Trade payables                                                                                         |  |      |       |              | $ | 254     |   | $ | 1,017   |  
|Other accounts payable and accrued
expenses                                                            |  |      | 11    |              |   | 3,524   |   |   | 3,092   |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|Total current
  liabilities                                                                            |  |      |       |              |   | 3,778   |   |   | 4,109   |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|LONG-TERM LIABILITIES:                                                                                 |  |      |       |              |   |         |   |   |         |  
|Long-term loan, net                                                                                    |  |      | 12    |              |   |        |   |   | 3,337   |  
|Accrued severance pay                                                                                  |  |      |       |              |   | 3,272   |   |   | 2,464   |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|Total long-term
  liabilities                                                                          |  |      |       |              |   | 3,272   |   |   | 5,801   |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|EMPLOYEE STOCK OPTIONS IN EZCHIP                                                                       |  |      | 15    |              |   | 2,141   |   |   | 557     |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|PREFERRED SHARES IN EZCHIP                                                                             |  |      | 2j,15 |              |   | 23,770  |   |   | 23,770  |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|COMMITMENTS AND CONTINGENT LIABILITIES                                                                 |  |      | 13    |              |   |         |   |   |         |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|SHAREHOLDERS EQUITY:                                                                                  |  |      |       |              |   |         |   |   |         |  
|Share capital                                                                                          |  |      |       |              |   |         |   |   |         |  
|Ordinary Shares of NIS 0.02 par value -                                                                |  |      | 14    |              |   |         |   |   |         |  
|Authorized: 50,000,000 and 30,000,000
  shares at December 31, 2007 and 2006, respectively;            |  |      |       |              |   |         |   |   |         |  
|Issued and outstanding: 18,312,245 and
  15,669,593 shares at December 31, 2007 and 2006, respectively |  |      |       |              |   | 106     |   |   | 93      |  
|Additional paid-in capital                                                                             |  |      |       |              |   | 162,233 |   |   | 117,716 |  
|Accumulated other comprehensive loss                                                                   |  |      |       |              |   | (11     | ) |   | (19     | )
|Accumulated deficit                                                                                    |  |      |       |              |   | (90,044 | ) |   | (85,734 | )
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|Total
  shareholders equity                                                                           |  |      |       |              |   | 72,284  |   |   | 32,056  |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  
|Total liabilities
  and shareholders equity                                                           |  |      |       |              | $ | 105,245 |   | $ | 66,293  |  
|                                                                                                       |  |      |       |              |   |         |   |   |         |  

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

F-5

---

---



|                                                           
|-----------------------------------------------------------
|LANOPTICS LTD. AND ITS SUBSIDIARIES                        
|                                                           
|CONSOLIDATED STATEMENTS OF OPERATIONS                      
|                                                           
|U.S. dollars in thousands (except share and per share data)

|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | ----------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                                                                                                                                              |  |      |    | Year ended December 31, |  
|                                                                                                                                                                              |  |      |    |                         |  
|                                                                                                                                                                              |  | Note |    | 2007                    |   | 2006       |   | 2005 |           
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |           
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Revenues                                                                                                                                                                      |  |      | 17 |                         | $ | 19,488     |   | $    | 8,469      |   | $ | 5,848      |  
|Costs of revenues (1),                                                                                                                                                        |  |      |    |                         |   | 8,032      |   |      | 3,664      |   |   | 2,350      |  
|Amortization of existing technology                                                                                                                                           |  |      |    |                         |   | 1,208      |   |      | 360        |   |   | 291        |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Gross profit                                                                                                                                                                  |  |      |    |                         |   | 10,248     |   |      | 4,445      |   |   | 3,207      |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Operating expenses:                                                                                                                                                           |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Research and development (net of grants and
  participations in the amount of $2,122, $1,003 and $0 for the years ended
  December 31, 2007, 2006 and 2005, respectively) (2) |  |      |    |                         |   | 8,529      |   |      | 8,402      |   |   | 8,215      |  
|In-process research and development charge                                                                                                                                    |  |      |    |                         |   | 396        |   |      | 2,033      |   |   | 1,475      |  
|Selling and marketing (3)                                                                                                                                                     |  |      |    |                         |   | 3,269      |   |      | 2,735      |   |   | 2,245      |  
|General and administrative (4)                                                                                                                                                |  |      |    |                         |   | 2,658      |   |      | 1,560      |   |   | 1,398      |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Total operating expenses                                                                                                                                                      |  |      |    |                         |   | 14,852     |   |      | 14,730     |   |   | 13,333     |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Operating loss                                                                                                                                                                |  |      |    |                         |   | (4,604     | ) |      | (10,285    | ) |   | (10,126    | )
|Financial and other income (expenses), net                                                                                                                                    |  |      | 18 |                         |   | 71         |   |      | (2,204     | ) |   | (312       | )
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Loss before minority interest                                                                                                                                                 |  |      |    |                         |   | (4,533     | ) |      | (12,489    | ) |   | (10,438    | )
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Minority interest in losses of EZchip                                                                                                                                         |  |      |    |                         |   | 445        |   |      | 172        |   |   | 206        |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Net loss before cumulative effect of change
  in accounting principle                                                                                                         |  |      |    |                         |   | (4,088     | ) |      | (12,317    | ) |   | (10,232    | )
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Cumulative effect of change in accounting
  principle                                                                                                                         |  |      | 2k |                         |   |           |   |      |           |   |   | (115       | )
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Net loss basic and diluted                                                                                                                                                    |  |      |    |                         | $ | (4,088     | ) | $    | (12,317    | ) | $ | (10,347    | )
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Net loss per share before cumulative effect
  of change in accounting principle                                                                                               |  |      |    |                         | $ | (0.25      | ) | $    | (1.05      | ) | $ | (0.92      | )
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Net loss per share                                                                                                                                                            |  |      |    |                         | $ | (0.25      | ) | $    | (1.05      | ) | $ | (0.93      | )
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  
|Weighted average number of Ordinary Shares
  used in computing net loss per share                                                                                             |  |      |    |                         |   | 16,533,369 |   |      | 11,745,171 |   |   | 11,156,250 |  
|                                                                                                                                                                              |  |      |    |                         |   |            |   |      |            |   |   |            |  

|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Includes
  equity-based compensation expense in the amount of $32 and $8 for the years
  ended December 31, 2007 and 2006, respectively.     
|    |                                                                                                                                              
|(2) | Includes
  equity-based compensation expense in the amount of $1,212 and $365 for the
  years ended December 31, 2007 and 2006, respectively.
|    |                                                                                                                                              
|(3) | Includes
  equity-based compensation expense in the amount of $321 and $122 for the
  years ended December 31, 2007 and 2006, respectively.  
|    |                                                                                                                                              
|(4) | Includes
  equity-based compensation expense in the amount of $893 and $114 for the
  years ended December 31, 2007 and 2006, respectively.  

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

F-6

---

---



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

|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | --------------- | - | ------------------------------ |  | --------------------------------------------------- | ------- | --------------------- | - | ---------------------------- | - | --------------------------------------------- | ------- | - | - | ------- | - | - | ------- | -
|                                                                                                     |  | Ordinary
  Shares |            | Share
  capital |   | Additional
  paid-in
  capital |  | Accumulated
  other
  comprehensive
  income (loss) |         | Accumulated
  deficit |   | Total
  comprehensive
  loss |   | Total
  shareholders
  equity
  (deficiency) |        
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |        
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |        
|Balance as of January 1, 2005                                                                        |  |                   | 10,626,285 |                 | $ | 70                             |  | $                                                   | 53,193  |                       | $ | (84                          | ) | $                                             | (63,070 | ) |   |         |   | $ | (9,891  | )
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|Issuance of shares, net of issuance cost of $11                                                      |  |                   | 1,006,486  |                 |   | 5                              |  |                                                     | 7,951   |                       |   |                             |   |                                               |        |   |   |         |   |   | 7,956   |  
|Exercise of stock options                                                                            |  |                   | 1,000      |                 |   | *)                            |  |                                                     | 3       |                       |   |                             |   |                                               |        |   |   |         |   |   | 3       |  
|Equity based compensation                                                                            |  |                   |           |                 |   |                               |  |                                                     | 38      |                       |   |                             |   |                                               |        |   |   |         |   |   | 38      |  
|Comprehensive loss:                                                                                  |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|Unrealized gains on available-for-sale
securities                                                    |  |                   |           |                 |   |                               |  |                                                     |        |                       |   | 48                           |   |                                               |        |   |   | 48      |   |   | 48      |  
|Net loss                                                                                             |  |                   |           |                 |   |                               |  |                                                     |        |                       |   |                             |   |                                               | (10,347 | ) |   | (10,347 | ) |   | (10,347 | )
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|Total comprehensive loss                                                                             |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   | (10,299 | ) |   |         |  
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|Balance as of December 31, 2005                                                                      |  |                   | 11,633,771 |                 |   | 75                             |  |                                                     | 61,185  |                       |   | (36                          | ) |                                               | (73,417 | ) |   |         |   |   | (12,193 | )
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|Issuance of shares, net of issuance cost of $43                                                      |  |                   | 3,878,235  |                 |   | 18                             |  |                                                     | 55,612  |                       |   |                             |   |                                               |        |   |   |         |   |   | 55,630  |  
|Exercise of stock options                                                                            |  |                   | 157,587    |                 |   | *)                            |  |                                                     | 867     |                       |   |                             |   |                                               |        |   |   |         |   |   | 867     |  
|Equity based compensation                                                                            |  |                   |           |                 |   |                               |  |                                                     | 52      |                       |   |                             |   |                                               |        |   |   |         |   |   | 52      |  
|Comprehensive loss:                                                                                  |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|Unrealized gains on available-for-sale
securities                                                    |  |                   |           |                 |   |                               |  |                                                     |        |                       |   | 17                           |   |                                               |        |   |   | 17      |   |   | 17      |  
|Net loss                                                                                             |  |                   |           |                 |   |                               |  |                                                     |        |                       |   |                             |   |                                               | (12,317 | ) |   | (12,317 | ) |   | (12,317 | )
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|Total comprehensive loss                                                                             |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   | (12,300 | ) |   |         |  
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|Balance as of December 31, 2006                                                                      |  |                   | 15,669,593 |                 |   | 93                             |  |                                                     | 117,716 |                       |   | (19                          | ) |                                               | (85,734 | ) |   |         |   |   | 32,056  |  
|Issuance of shares, net of issuance cost of $150                                                     |  |                   | 2,500,000  |                 |   | 12                             |  |                                                     | 43,465  |                       |   |                             |   |                                               |        |   |   |         |   |   | 43,477  |  
|Exercise of stock options                                                                            |  |                   | 142,652    |                 |   | 1                              |  |                                                     | 623     |                       |   |                             |   |                                               |        |   |   |         |   |   | 624     |  
|Equity based compensation                                                                            |  |                   |           |                 |   |                               |  |                                                     | 429     |                       |   |                             |   |                                               |        |   |   |         |   |   | 429     |  
|Comprehensive loss:                                                                                  |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|Unrealized gains on available-for-sale
securities                                                    |  |                   |           |                 |   |                               |  |                                                     |        |                       |   | 8                            |   |                                               |        |   |   | 8       |   |   | 8       |  
|Cumulative effect of change in accounting for
uncertainties in income
  taxes (FIN 48  See note 2n) |  |                   |           |                 |   |                               |  |                                                     |        |                       |   |                             |   |                                               | (222    | ) |   |        |   |   | (222    | )
|Net loss                                                                                             |  |                   |           |                 |   |                               |  |                                                     |        |                       |   |                             |   |                                               | (4,088  | ) |   | (4,088  | ) |   | (4,088  | )
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|Total comprehensive loss                                                                             |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   | $ | (4,080  | ) |   |         |  
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  
|Balance as of December 31, 2007                                                                      |  |                   | 18,312,245 |                 | $ | 106                            |  | $                                                   | 162,233 |                       | $ | (11                          | ) | $                                             | (90,044 | ) |   |         |   | $ | 72,284  |  
|                                                                                                     |  |                   |            |                 |   |                                |  |                                                     |         |                       |   |                              |   |                                               |         |   |   |         |   |   |         |  

*) Less than $ 1.

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

F-7

---

---



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

|                                                                                             |  |                         |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                             |  | Year ended December 31, |        
|                                                                                             |  |                         |        
|                                                                                             |  | 2007                    |         | 2006 |   | 2005    |  
|                                                                                             |  |                         |         |      |   |         |  
|                                                                                             |  |                         |         |      |   |         |  
|Cash flows from operating activities:                                                        |  |                         |         |      |   |         |   |   |         |  
|Net loss                                                                                     |  | $                       | (4,088  | )    | $ | (12,317 | ) | $ | (10,347 | )
|Adjustments to reconcile net loss to net
  cash used in operating activities:                |  |                         |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                                |  |                         | 1,655   |      |   | 682     |   |   | 625     |  
|In-process research and development
charge                                                   |  |                         | 396     |      |   | 2,033   |   |   | 1,475   |  
|Interest and amortization of
  premium/discount/accretion of marketable securities           |  |                         | (82     | )    |   | (85     | ) |   | 152     |  
|Accrued interest and revaluation to fair
  value of Redeemable Preferred Shares in EZchip    |  |                         |        |      |   | 2,649   |   |   | 890     |  
|Accrued severance pay, net                                                                   |  |                         | 119     |      |   | 87      |   |   | (70     | )
|Amortization of discount on long-term
loan                                                   |  |                         | 663     |      |   | 80      |   |   |        |  
|Stock-based compensation related to options
  granted to employees in the Company and EZchip |  |                         | 2,458   |      |   | 609     |   |   | 38      |  
|Minority interest in losses of EZchip                                                        |  |                         | (445    | )    |   | (172    | ) |   | (206    | )
|Capital gain from sale of property and
  equipment                                           |  |                         |        |      |   |        |   |   | (3      | )
|Realized loss related to sale of marketable
  securities                                     |  |                         |        |      |   |        |   |   | 9       |  
|Cumulative effect of change in accounting
  principle                                        |  |                         |        |      |   |        |   |   | 115     |  
|Change in fair value of warrants to
  Redeemable Preferred Shares                            |  |                         |        |      |   | (9      | ) |   | (9      | )
|Increase in trade receivables, net                                                           |  |                         | (1,218  | )    |   | (775    | ) |   | (151    | )
|Write down of bad debt                                                                       |  |                         | 47      |      |   |        |   |   |        |  
|Decrease (increase) in other accounts
  receivable and prepaid expenses                      |  |                         | (497    | )    |   | (383    | ) |   | 403     |  
|Decrease (increase) in inventory                                                             |  |                         | 415     |      |   | (1,391  | ) |   | (819    | )
|Increase (decrease) in trade payables                                                        |  |                         | (763    | )    |   | 680     |   |   | (518    | )
|Increase (decrease) in other accounts
  payable and accrued expenses                         |  |                         | 210     |      |   | 1,176   |   |   | (562    | )
|                                                                                             |  |                         |         |      |   |         |   |   |         |  
|                                                                                             |  |                         |         |      |   |         |   |   |         |  
|Net cash used in operating activities                                                        |  |                         | (1,130  | )    |   | (7,136  | ) |   | (8,978  | )
|                                                                                             |  |                         |         |      |   |         |   |   |         |  
|                                                                                             |  |                         |         |      |   |         |   |   |         |  
|Cash flows from investing activities:                                                        |  |                         |         |      |   |         |   |   |         |  
|Investment in marketable securities                                                          |  |                         | (6,613  | )    |   | (5,471  | ) |   |        |  
|Net cash paid for acquisition of minority
  shares in EZchip (see a. below)                  |  |                         | (14,228 | )    |   |        |   |   |        |  
|Proceeds from sale and redemption of
  marketable securities                                 |  |                         | 1,019   |      |   | 5,495   |   |   | 6,566   |  
|Purchase of property and equipment                                                           |  |                         | (309    | )    |   | (231    | ) |   | (217    | )
|Proceeds from sale of property and
  equipment                                               |  |                         | 1       |      |   |        |   |   | 14      |  
|                                                                                             |  |                         |         |      |   |         |   |   |         |  
|                                                                                             |  |                         |         |      |   |         |   |   |         |  
|Net cash provided by (used in) investing
  activities                                        |  | $                       | (20,130 | )    | $ | (207    | ) | $ | 6,363   |  
|                                                                                             |  |                         |         |      |   |         |   |   |         |  

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

F-8

---

---



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

|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|---------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------ | - | - | ------ | -
|                                                                                                     |  | Year ended December 31, |        
|                                                                                                     |  |                         |        
|                                                                                                     |  | 2007                    |         | 2006 |   | 2005   |  
|                                                                                                     |  |                         |         |      |   |        |  
|                                                                                                     |  |                         |         |      |   |        |  
|Cash flows from financing activities:                                                                |  |                         |         |      |   |        |   |   |        |  
|Issuance of shares, net                                                                              |  | $                       | 43,477  |      | $ |       |   | $ | (11    | )
|Issuance of Redeemable Preferred Shares in
  EZchip, net                                             |  |                         |        |      |   |       |   |   | 3,028  |  
|Proceeds from exercise of options                                                                    |  |                         | 624     |      |   | 867    |   |   | 3      |  
|Proceeds from exercise of options in EZchip                                                          |  |                         | 445     |      |   | 172    |   |   | 206    |  
|Proceeds from exercise of warrants to
  Redeemable Preferred Shares in EZchip                        |  |                         |        |      |   | 375    |   |   |       |  
|Proceeds from long-term loan                                                                         |  |                         |        |      |   | 4,000  |   |   |       |  
|Repayment of long-term loan                                                                          |  |                         | (4,000  | )    |   |       |   |   |       |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|Net cash provided by financing activities                                                            |  |                         | 40,546  |      |   | 5,414  |   |   | 3,226  |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|Increase (decrease) in cash and cash
  equivalents                                                   |  |                         | 19,286  |      |   | (1,929 | ) |   | 611    |  
|Cash and cash equivalents at the beginning
  of the year                                             |  |                         | 12,186  |      |   | 14,115 |   |   | 13,504 |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|Cash and cash equivalents at the end of the
  year                                                   |  | $                       | 31,472  |      | $ | 12,186 |   | $ | 14,115 |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|Supplemental disclosure of cash flows
  activities:                                                  |  |                         |         |      |   |        |   |   |        |  
|Cash paid during the year for:                                                                       |  |                         |         |      |   |        |   |   |        |  
|Interest on long term loan                                                                           |  | $                       | 272     |      | $ | 110    |   | $ |       |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|a. Net cash paid for acquisition of
  minority shares in EZchip (see Notes 3j and 3i)                |  |                         |         |      |   |        |   |   |        |  
|EZchips tangible assets acquired by the
  Company                                                   |  |                         | (4,138  | )    |   |       |   |   |       |  
|Intangible assets acquired:                                                                          |  |                         |         |      |   |       |   |   |       |  
|Existing technology                                                                                  |  |                         | (205    | )    |   |       |   |   |       |  
|Backlog                                                                                              |  |                         | (6      | )    |   |       |   |   |       |  
|Customer base                                                                                        |  |                         | (140    | )    |   |       |   |   |       |  
|Goodwill                                                                                             |  |                         | (13,002 | )    |   |       |   |   |       |  
|In-process research and development                                                                  |  |                         | (396    | )    |   |       |   |   |       |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|Total Consideration                                                                                  |  | $                       | (17,887 | )    | $ |       |   | $ |       |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|Less: Consideration received by the Company
  in connection with EZchips employees options exercise |  | $                       | 3,659   |      |   |       |   |   |       |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  
|Net cash paid for acquisition                                                                        |  | $                       | (14,228 | )    | $ |       |   | $ |       |  
|                                                                                                     |  |                         |         |      |   |        |   |   |        |  

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

F-9

---

---



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

|                                                                                                                                    |  |                         |   |      |   |        |  |   |       | 
|----------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - | ---- | - | ------ |  | - | ----- | 
|                                                                                                                                    |  | Year ended December 31, |  
|                                                                                                                                    |  | 2007                    |   | 2006 |   | 2005   | 
|                                                                                                                                    |  |                         |   |      |   |        | 
|                                                                                                                                    |  |                         |   |      |   |        | 
|b. Non-cash activities:                                                                                                             |  |                         |   |      |   |        |  |   |       | 
|                                                                                                                                    |  |                         |   |      |   |        |  |   |       | 
|EZchip
  shares acquisition (see Notes 3g & 3h):                                                                                    |  |                         |   |      |   |        |  |   |       | 
|EZchips tangible assets acquired by the
  Company                                                                                  |  |                         |  |      |   | 18,808 |  |   | 1,142 | 
|Intangible
  assets acquired:                                                                                                       |  |                         |   |      |   |        |  |   |       | 
|Existing technology                                                                                                                 |  |                         |  |      |   | 2,752  |  |   | 517   | 
|Backlog                                                                                                                             |  |                         |  |      |   | 240    |  |   |      | 
|Customer base                                                                                                                       |  |                         |  |      |   | 141    |  |   |      | 
|Goodwill                                                                                                                            |  |                         |  |      |   | 31,698 |  |   | 4,833 | 
|In-process research and development                                                                                                 |  |                         |  |      |   | 2,033  |  |   | 1,475 | 
|                                                                                                                                    |  |                         |   |      |   |        |  |   |       | 
|                                                                                                                                    |  |                         |   |      |   |        |  |   |       | 
|Value of shares acquired                                                                                                            |  | $                       |  |      | $ | 55,672 |  | $ | 7,967 | 
|                                                                                                                                    |  |                         |   |      |   |        |  |   |       | 
|                                                                                                                                    |  |                         |   |      |   |        |  |   |       | 
|Reclassification of Redeemable Preferred
  Shares to Preferred Shares in EZchip upon shares acquisition transaction (see
  Note 3h) |  | $                       |  |      | $ | 9,983  |  | $ |      | 
|                                                                                                                                    |  |                         |   |      |   |        |  |   |       | 

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

F-10

---

---



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

|         |        
|-------- | -------
|NOTE 1:- | GENERAL

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | LanOptics
  Ltd. (the Company) was incorporated as a limited liability company under
  the laws of the State of Israel in 1989. The Companys business consists
  exclusively of the business of its subsidiary, EZchip Technologies Ltd.
  (EZchip), a company that is engaged in the development and marketing of
  Ethernet network processors for networking equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | EZchip is a
  fabless semiconductor company that provides Ethernet network processors.
  EZchip provides its customers with solutions that scale from 1-Gigabit to
  100-Gigabit per second with a common architecture and software across all
  products. EZchips network processors provide the flexibility and integration
  that enable triple-play data, voice and video services in access, metro and
  edge systems that make up the new Carrier Ethernet networks.                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | EZchip was
  established in December 1999 as a wholly-owned subsidiary of the Company.
  Over the years EZchip raised funds from third party investors while diluting
  the Companys holding. As of December 31, 2007, the Company held 78.5% of
  EZchip shares and voting rights (see also Note 19). As of January 22, 2008, the
  Company owns all the outstanding Redeemable Preferred Shares (see Note 19).
  During 2001, EZchip established a wholly-owned subsidiary, EZchip Inc., in
  the United States, which is engaged in the marketing and selling of EZchips
  products.                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | b. | The Companys
  ordinary shares were listed on the NASDAQ Global Market under the symbol
  LNOP from its initial public offering in November 1992 until April 14,
  2003, at which date the listing of its ordinary shares was transferred to the
  NASDAQ Capital Market. Since January 4, 2008, the Companys ordinary shares have been listed once
  again on the NASDAQ Global Market and on January 17, 2008 its NASDAQ ticker
  symbol changed to EZCH. Since April 1, 2002, the Companys ordinary shares have also been traded on the Tel
  Aviv Stock Exchange.                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | c. | All of the
  Companys network processor chips are manufactured by two third party
  subcontractors. While these subcontractors have been able to adequately meet
  the demands of the Companys increasing business, the Company is and will
  likely continue to be dependent upon such subcontractors to achieve
  acceptable manufacturing yields, quality levels and costs, and to allocate to
  the Company sufficient capacity to meet the Companys needs in a timely
  manner. Revenues could be materially and adversely affected should these
  subcontractors fail to meet the Companys demand for products due to a
  shortage of production capacity, process difficulties, low yield rates or
  financial instability. For the year ended December 31, 2007 these major
  subcontractors accounted for approximately 71% of the Companys cost of
  revenues.

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

| |    |                                                                                                                                                                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The
  consolidated financial statements were prepared in accordance with United
  States generally accepted accounting principles (U.S. GAAP) applied on a
  consistent basis except as described in Notes 2n and 2p below are 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.

F-11

---

---



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

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. Most of the revenues
  are denominated and earned in U.S. dollars, and most purchases of materials
  and components are made in U.S. dollars, Financing and investing activities,
  including equity transactions and cash investments, are made in U.S. dollars
  and most of its assets are denominated in U.S. dollars. Thus, the functional
  and reporting currency of the Company and EZchip is the U.S. dollar.                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Accordingly,
  monetary accounts maintained in currencies other than the U.S. dollar are
  remeasured into U.S. dollars in accordance with the 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. Intercompany balances and transactions have been eliminated
  upon consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | d. | Cash
  equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company
  considers all highly liquid investments that are convertible to cash with
  original 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 in accordance with 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 2007 and 2006, all marketable securities were designated as
  available-for-sale securities. 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Following
  SEC Staff Accounting Bulletin No. 59, EITF 03-1 and FAS 115-1, management
  evaluates in each period whether declines in the market value of its
  securities are other than temporary. Where such declines are determined to be
  other than temporary, the related unrealized loss is recorded as a write-down
  included in financial expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-12

---

---



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

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)

| |    |                                                                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                              
| |    |                                                                                                                                                                                      
| |    | 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:                                                                                                                                      

|                                               |  |                                                
|---------------------------------------------- |  | -----------------------------------------------
|                                               |  | Percentage (%)                                 
|                                               |  |                                                
|                                               |  |                                                
|Office
  furniture and equipment               |  | 6                                              
|Computers,
  software and electronic equipment |  | 33                                             
|Leasehold
  improvements                       |  | Shorter of the term of the lease or useful life

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 2007, 2006 and 2005, no
  impairment losses have been identified.

F-13

---

---



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

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i. | Goodwill and
  intangible assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Goodwill
  reflects the excess of the purchase price of business an acquired business
  over the fair value of net assets acquired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Company
  adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other
  Intangible Assets (SFAS No. 142). Under SFAS No. 142, goodwill is not
  amortized but instead is tested for impairment at least annually. The Company
  performs an annual impairment test during the fourth quarter of each fiscal
  year, or more frequently if impairment indicators are present. The Company
  operates in one operating segment, and this segment comprises its only
  reporting unit.                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | SFAS No. 142
  prescribes a two-phase process for impairment testing of goodwill. The first
  phase screens for impairment while the second phase (if necessary) measures
  impairment. In the first phase of impairment testing, goodwill attributable
  the reporting unit is tested for impairment by comparing the fair value of
  the reporting unit with its carrying value. As of December 31, 2007, no
  instances of impairment were found.                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Intangible
  Assets are amortized over their useful lives using a method of amortization
  that reflects the pattern in which the economic benefits of the intangible
  assets are consumed or otherwise used up, in accordance with SFAS No. 142.
  The Company amortizes its intangible assets on a straight line basis over
  their estimated useful lives, which is up to 5 years. The weighted average
  amortization period is 3 years.                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | j. | Preferred
  Shares in EZchip:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Until
  December 31, 2005, investments by third parties in Redeemable Preferred
  Shares and in Preferred Shares in EZchip were presented as two separate
  components in the balance sheet. Following the acquisition of certain EZchip
  shares by the Company on December 22, 2006 (see also Notes 3e and 3h), the
  Redeemable Preferred Shares were classified as Preferred Shares in the EZchip
  account                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Redeemable
  Preferred Shares in EZchip may be redeemed at the request of the majority
  holders of such shares after March 2007 (four years after the original
  issuance date), at a price per share equal to the greater of (a) the original
  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.                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Through
  December 22, 2006, the date on which the Company acquired certain EZchip
  shares (see Note 3h), the Redeemable Preferred Shares balances included an
  accrual reflecting the higher of (a) or (b) above. The total accretion for
  the years ended December 31, 2007, 2006 and 2005, were $0, $2,649 and $890,
  respectively. Following the previously mentioned acquisition of EZchip
  shares, the Company stopped the accretion to redemption value since the Company
  acquired the majority of the Redeemable Preferred Shares and as such, the
  redemption right was within the control of the Company (see Note 3e). As of
  January 22, 2008, the Company owns all the outstanding Redeemable Preferred
  Shares (see Note 19).

F-14

---

---



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

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | k. | Warrants to
  Redeemable Preferred Shares in EZchip:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | In April
  2003, EZchip granted a warrant to purchase Preferred C Shares in connection
  with a Loan Agreement with a third party. The loan was repaid in August 2004.
  This warrant was exercised and the underlying Preferred C Shares were
  purchased by the Company on December 22, 2006 (see Note 3h).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | EZchip
  accounted for the warrant in accordance with FASB Staff Position FASB
  Statement No. 150 Accounting for Certain Financial Instruments with
  Characteristics of both Liabilities and Equity (FSP FAS-150-5). Under FSP FAS-150-5
  the warrant was classified as a liability and carried at its fair value. The
  guidance of this FSP was applied in the first interim period beginning after
  June 30, 2005 and resulted in a cumulative affect of a change in accounting
  principles of $115.                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | Changes in
  fair value of the warrant was charged to the statements of operations in each
  reporting period. The fair value of the warrants was determined using the
  Black  Scholes option pricing model, with the following assumptions as of
  December 22, 2006 and December 31, 2005: risk free interest rate of 4.1% and
  3.72%, dividend yield of 0%, expected life of between 5.0 to 5.75 years and
  expected volatility of 80%. The computation of expected volatility was based
  on realized historical stock price volatility of peer companies. As of
  December 31, 2006 and 2005 the Company recorded income related to the change
  in fair value of the warrant in the amount of $9 each year.                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | l. | Research and
  development costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | Research and
  development costs net of participation and grants from the Office of the
  Chief Scientist of the Ministry of Industry, Trade and Labor of Israel (the OCS) are
  charged to expenses as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | m. | Severance
  pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | The
  liability of the Company and EZchip 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 for the years ended December 31, 2007, 2006 and 2005 were $407, $329
  and $225, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-15

---

---



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

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | n. | Income
  taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Company
  and its affiliates 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.                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | On January 1, 2007, the Company
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 contains
a two-step approach to recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS No. 109. The first step is to evaluate the tax position taken or
expected to be taken in a tax return by determining if the weight of available evidence
indicates that it is more likely than not that, on an evaluation of the technical merits,
the tax position will be sustained on audit, including resolution of any related appeals
or litigation processes. The second step is to measure the tax benefit as the largest
amount that is more than 50% likely to be realized upon ultimate settlement. The Company
recognizes interest and penalties, if any, related to unrecognized tax benefits in its
provision for income tax.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | o. | Net losses
  per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Basic net
  loss per share is computed based on the weighted average number of Ordinary
  Shares outstanding during each year. Diluted net losses per share are
  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 Statement of Financial
  Accounting Standard No. 128 Earnings Per Share(SFAS No. 128).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | For the
  years ended December 31, 2007, 2006 and 2005, all outstanding stock options
  and warrants have been excluded from the calculation of the diluted net loss
  per share because all such stock options were anti-dilutive. The total
  weighted average number of Ordinary Shares related to options, warrants and
  restricted share units excluded from the calculation of diluted net loss per
  share were 783,300, 813,952 and 971,539 for the years ended December 31,
  2007, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                        

F-16

---

---



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

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | p. | Accounting
  for stock based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | On January
  1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based
  Payment (SFAS No. 123(R)), which requires the measurement and recognition
  of compensation expense based on estimated fair values for all stock-based payment
  awards made to employees and directors. SFAS No. 123(R) supersedes Accounting
  Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
  (APB No. 25), for periods beginning in fiscal year 2006. In March 2005, the
  Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
  (SAB 107) relating to SFAS No. 123(R). The Company has applied the
  provisions of SAB 107 in its adoption of SFAS No. 123(R). SFAS No. 123(R)
  requires companies to estimate the fair value of equity-based payment awards
  on the date of grant using an option-pricing model. The value of the portion
  of the award that is ultimately expected to vest is recognized as an expense
  over the requisite service periods in the Companys consolidated income statements.   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Prior to the
  adoption of SFAS No. 123(R), the Company accounted for equity-based awards to
  employees and directors using the intrinsic value method in accordance with
  APB No. 25 as allowed under SFAS No. 123, Accounting for Stock-Based Compensation
  (SFAS No. 123). Pursuant to these accounting standards, the Company
  recorded deferred compensation for stock options granted to employees at the
  date of grant equal to the excess of the market value of the underlying
  shares at that date over the exercise price of the options. Furthermore, when
  terms of options granted were modified, the Company accounted for the
  modifications as an exchange of the original award, resulting in additional
  compensation expenses based on the differences between the fair value of the
  new award and the original award immediately before modification and in
  accordance with SFAS No 123.                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The Company
  adopted SFAS No. 123(R) using the modified prospective transition method,
  which requires the application of the accounting standard starting the first
  day of the Companys fiscal year 2006. Under that transition method,
  compensation cost recognized in the years ended December 31, 2007 and 2006,
  includes: (a) compensation cost for all stock-based payments granted prior to,
  but not yet vested as of January 1, 2006, based on the grant date fair value
  estimated in accordance with the original provisions of SFAS No. 123, and (b)
  compensation cost for all stock-based payments granted subsequent to January
  1, 2006, based on the grant-date fair value estimated in accordance with the
  provisions of SFAS No. 123(R). Results for prior periods have not been
  restated. The Company selected the Black-Scholes option pricing model as the
  most appropriate fair value method for its stock-options awards and values
  restricted stock based on the market value of the underlying shares at the
  date of grant.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The Company
  recognizes compensation expenses for the value of its awards based on the
  straight line method over the requisite service period of each of the awards,
  net of estimated forfeitures. SFAS No. 123(R) requires forfeitures to be
  estimated at the time of grant and revised, if necessary, in subsequent
  periods if actual forfeitures differ from those estimates. Estimated
  forfeitures are based on actual historical pre-vesting forfeitures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-17

---

---



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

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | p. | Accounting
  for stock based compensation (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The Company
  estimates the fair value of stock options granted using the
  Black-Scholes-Merton valuation model. The option-pricing model requires a
  number of assumptions, of which the most significant are the expected stock
  price volatility and the expected option term. Expected volatility was
  calculated based upon actual historical stock price movements. The expected
  term of options granted is calculated in accordance with the provisions of
  SAB 107. Under the simplified method, the expected term is calculated as
  the midpoint between the vesting date and the end of the contractual term of
  the option.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The
  risk-free interest rate is based on the yield from U.S. treasury bonds with
  an equivalent term effective on the time of grant. The Company has
  historically not paid dividends and has no foreseeable plans to pay
  dividends. For the assumptions used in the pricing model, see also Note 14.                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | Pro Forma
  Information under SFAS 123 (R)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The
  following table illustrates the assumptions that had been
  used in calculating the fair value for options granted to EZchips employees
  in 2005. These options are amortized over their vesting period and
  their fair value was estimated at the date of grant using the Black-Scholes
  pricing model:                                                                                                                                                                                                                                                                                                                               

|                       |  |                           |         |  
|---------------------- |  | ------------------------- | ------- | -
|                       |  | Year ended
  December 31, |        
|                       |  |                           |        
|                       |  | 2005                      |        
|                       |  |                           |        
|                       |  |                           |        
|Dividend yield         |  |                           | 0       | %
|Expected volatility    |  |                           | 80      | %
|Risk-free interest     |  |                           | 4.28    | %
|Expected life of up to |  |                           | 6 years |  

| |  |                                                                                                                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
  following table illustrates the effect on net loss and net
  loss per share if the Company had applied the fair value recognition
  provisions of SFAS No.123 to options granted under the Companys and EZchips
  stock options plans in all periods presented:

|                                                                                          |  |                           |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------- | ------- | -
|                                                                                          |  | Year ended
  December 31, |        
|                                                                                          |  |                           |        
|                                                                                          |  | 2005                      |        
|                                                                                          |  |                           |        
|                                                                                          |  |                           |        
|Net loss as reported                                                                      |  | $                         | (10,347 | )
|Add: stock-based employee compensation
  expense determined under fair value based method |  |                           | (568    | )
|Deduct: stock-based employee compensation
  expense included in reported net loss         |  |                           | 38      |  
|                                                                                          |  |                           |         |  
|                                                                                          |  |                           |         |  
|Pro forma net loss                                                                        |  | $                         | (10,877 | )
|                                                                                          |  |                           |         |  
|                                                                                          |  |                           |         |  
|Net loss per share, as reported                                                           |  | $                         | (0.93   | )
|                                                                                          |  |                           |         |  
|                                                                                          |  |                           |         |  
|Pro forma net loss per share                                                              |  | $                         | (0.98   | )
|                                                                                          |  |                           |         |  

F-18

---

---



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

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | q. | Revenue
  recognition:                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company
  generates its revenues mainly from sales of network processors
  chips and to a lesser extent from the sales of network-processor based
  systems, software tools and maintenance and support services, through EZchip
  and its wholly owned subsidiary EZchip Inc.                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Revenues
  from network processors chips and network-processor based
  systems are recognized upon delivery in accordance with Staff Accounting Bulletin
  No. 104 Revenue Recognition (SAB 104), when persuasive evidence of an
  agreement exists, delivery of the product has occurred, the fee is fixed or
  determinable and collectability is probable. The Company does not have any
  significant obligations after delivery.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Revenues
  from sales of software tools and maintenance and support services, which are
  sold separately from other products, are
  recognized in accordance with Statement of Position 97-2, Software Revenues
  Recognition (SOP 97-2). The Company uses the residual method when Vendor
  Specific Objective Evidence (VSOE) of fair value only exists for the
  maintenance.                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In certain instances,
  the Company sells network-processor based systems together with software
  tools and maintenance and support services. In those cases the Company complies
  with the requirements set forth in EITF 00-21 Revenue Arrangements with
  Multiple Deliverables,
  relating to the separation of multiple deliverables into individual
  accounting units with determinable fair values.                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company
  does not grant a right of return to its customers. In addition if a
  transaction sale does not meet all the criteria, the revenue is
  deferred until all criteria are met.                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Deferred
  revenues include unearned amounts received from maintenance and support
  services and amounts received from customers but not yet recognized as
  revenues.                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | r. | Advertising
  expenses:                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Advertising
  expenses are charged to the statement of operations, as incurred.
  Advertising expenses for the years ended December 31, 2007,
  2006 and 2005 amounted to $107, $132 and $120, respectively.                                                                                                                                                                                                                             

F-19

---

---



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

|         |                                        
|-------- | ---------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | s. | 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, Europe
  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 are investments in debt of U.S. corporations.
  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.                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | t. | 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, other accounts payable and accrued expenses
  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. If
  the market value is lower than the amortized cost for an
  other-than-temporary period, then the amortization is included in the
  financial expenses. As for the fair value of the marketable securities see
  Note 4.                                                                                                                        

F-20

---

---



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

|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | u.                                      | Royalty-bearing
  grants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | Royalty-bearing
  grants from the Office of the Chief Scientist of the Ministry of Industry,
  Trade and Labor of Israel (the OCS) for funding approved research and
  development projects are recognized at the time EZchip is entitled to such
  grants, on the basis of the costs incurred and included as a reduction of
  research and development costs. Research and development grants recognized in
  2007, 2006 and 2005 amounted to $2,122, $1,003 and $0, respectively.                                                                                           
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | As of
  December 31, 2007, the Company accrued royalties pursuant to the OCS program
  in the amount of $14. The royalties were recorded as part of cost of
  revenues.                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | v.                                      | Comprehensive
  loss:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | The Company
  accounts for comprehensive income in accordance with SFAS No. 130, Reporting
  Comprehensive Income. This statement establishes standards for the reporting
  and display of comprehensive loss/income and its components in a full set of
  general purpose financial statements. Comprehensive loss/income generally
  represents all changes in stockholders equity during the period. The Company
  determined that its items of other comprehensive loss/income relates to gain
  and loss on unrealized gains and losses on available for sale securities.
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | w.                                      | Impact of
  recently issued accounting standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                         | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | SFAS No.
  157:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | In September
  2006, the FASB issued Statement of Financial Accounting Standards No. 157,
  Fair Value Measurements (SFAS 157) which defines fair value, establishes a
  framework for measuring fair value, and expands disclosures about fair value
  measurements. SFAS 157 applies to other accounting pronouncements that
  require or permit fair value measurements and, accordingly, does not require
  any new fair value measurements. SFAS 157 is effective for fiscal years
  beginning after November 15, 2007 for financial assets and liabilities, as
  well as for any other assets and liabilities that are carried at fair value
  on a recurring basis, and should be applied prospectively. The adoption of
  the provisions of SFAS 157 related to financial assets and liabilities and
  other assets and liabilities that are carried at fair value on a recurring
  basis is not anticipated to materially impact the Companys consolidated
  financial position and results of operations. Subsequently, the FASB provided
  for a one-year deferral of the provisions of SFAS 157 for non-financial
  assets and liabilities that are recognized or disclosed at fair value in the
  consolidated financial statements on a non-recurring basis. The Company is
  currently evaluating the impact of adopting the provisions of SFAS 157 for
  non-financial assets and liabilities that are recognized or disclosed on a
  non-recurring basis.

F-21

---

---



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

|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|-------- | --------------------------------------- | --------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | v.                                      | Impact of
  recently issued accounting standards (cont.):
|         |                                         |                                                          
|         |                                         | 2.                                                        | SFAS No.
  159:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                           | In February
  2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
  Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159
  permits companies to choose to measure certain financial instruments and
  certain other items at fair value. The standard requires that unrealized
  gains and losses on items for which the fair value option has been elected be
  reported in earnings. The provisions of SFAS No. 159 are effective
  for the Company beginning January 1, 2008. The company has determined
  that the adoption of SFAS 159 will not have an impact on its consolidated
  financial statements since it has not elected the fair value option for any
  of its existing assets or liabilities as of FAS 159 effective date..
|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         | 3.                                                        | SAB No. 110:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                           | On December
  21, 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (SAB 110),
  which, effective January 1, 2008, amends and replaces SAB 107, Share-Based
  Payment. SAB 110 expresses the views of the SEC staff regarding the use of a
  simplified method in developing an estimate of expected term of plain
  vanilla share options in accordance with FASB Statement No. 123(R),
  Share-Based Payment. Under the simplified method, the expected term is
  calculated as the midpoint between the vesting date and the end of the
  contractual term of the option.                                                                                                                                                                             
|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                         |                                                           | The use of
  the simplified method, which was first described in Staff Accounting
  Bulletin No. 107, was scheduled to expire on December 31, 2007. SAB 110
  extends the use of the simplified method for plain vanilla awards in
  certain situations. The SEC staff does not expect the simplified method to
  be used when sufficient information regarding exercise behavior, such as
  historical exercise data or exercise information from external sources,
  becomes available. The Company expects to continue using the simplified
  method. As a result, the Company does not expect the adoption of SAB No. 110
  will have significant impact on its consolidated financial statement.                                                                

F-22

---

---



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

|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------- | --------------------------------------- | --------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | v.                                      | Impact of
  recently issued accounting standards (cont.):
|         |                                         |                                                          
|         |                                         | 4.                                                        | SFAS No.
  141(R)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         |                                                           | In December
  2007, the FASB issued SFAS 141(R), Business Combinations. This Statement
  replaces SFAS 141, Business Combinations, and requires an acquirer to recognize
  the assets acquired, the liabilities assumed, including those arising from
  contractual contingencies, any contingent consideration, and any
  noncontrolling interest in the acquiree at the acquisition date, measured at
  their fair values as of that date, with limited exceptions specified in the
  statement. SFAS 141(R) also requires the acquirer in a business combination
  achieved in stages (sometimes referred to as a step acquisition) to recognize
  the identifiable assets and liabilities, as well as the noncontrolling
  interest in the acquiree, at the full amounts of their fair values (or other
  amounts determined in accordance with SFAS 141(R)). In addition, SFAS
  141(R)s requirement to measure the noncontrolling interest in the acquiree
  at fair value will result in recognizing the goodwill attributable to the
  noncontrolling interest in addition to that attributable to the acquirer.
  SFAS 141(R) amends SFAS No. 109, Accounting for Income Taxes, to require the
  acquirer to recognize changes in the amount of its deferred tax benefits that
  are recognizable because of a business combination either in income from
  continuing operations in the period of the combination or directly in
  contributed capital, depending on the circumstances. It also amends SFAS 142,
  Goodwill and Other Intangible Assets, to, among other things, provide
  guidance on the impairment testing of acquired research and development
  intangible assets and assets that the acquirer intends not to use. SFAS
  141(R) applies prospectively to business combinations for which the
  acquisition date is on or after the beginning of the first annual reporting
  period beginning on or after December 15, 2008. SFAS 141R will have an impact
  on accounting for future business combinations once adopted and not on prior
  acquisitions. As such the adoption of the provisions of FAS 141R is not
  expected to impact the companys consolidated financial statements.

F-23

---

---



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

|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-------- | --------------------------------------- | --------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (CONT.)
|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | v.                                      | Impact of
  recently issued accounting standards (cont.):
|         |                                         |                                                          
|         |                                         | 5.                                                        | SFAS No. 160                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         |                                                           | In December
  2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated
  Financial Statements. SFAS 160 amends Accounting Research Bulletin 51,
  Consolidated Financial Statements, to establish accounting and reporting
  standards for the noncontrolling interest in a subsidiary and for the
  deconsolidation of a subsidiary. It also clarifies that a noncontrolling
  interest in a subsidiary is an ownership interest in the consolidated entity
  that should be reported as equity in the consolidated financial statements.
  SFAS 160 also changes the way the consolidated income statement is presented
  by requiring consolidated net income to be reported at amounts that include
  the amounts attributable to both the parent and the noncontrolling interest.
  It also requires disclosure, on the face of the consolidated statement of
  income, of the amounts of consolidated net income attributable to the parent
  and to the noncontrolling interest. SFAS 160 requires that a parent recognize
  a gain or loss in net income when a subsidiary is deconsolidated and requires
  expanded disclosures in the consolidated financial statements that clearly
  identify and distinguish between the interests of the parent owners and the
  interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective
  for fiscal periods, and interim periods within those fiscal years, beginning
  on or after December 15, 2008. The adoption of the provisions of Statement
  No. 160 is not anticipated to materially impact the Companys consolidated
  financial position and results of operations.
|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         | 6.                                                        | EITF 07-03                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                         |                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                         |                                                           | In
  June 2007, the Emerging Issues Task Force (EITF) of the FASB reached a
  consensus on Issues 07-03, Accounting for Nonrefundable Advance Payment for
  Goods or Services to be Used in Future Research and Development Activities,
  (EITF 07-03), which addresses the diversity which exists with respect to
  the accounting for the non-refundable portion of a payment made by a research
  and development entity for future research and development activities. Under
  EITF 07-03, an entity would defer and capitalize non-refundable advance
  payments made for research and development activities until the related goods
  are delivered or the related service are performed. EITF 07-03 is effective
  for fiscal years beginning after December 15, 2007. The Company is in the
  process of evaluating the impact of EITF 07-03, however, the Company does not
  expect it to have a significant impact on its consolidated financial
  statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-24

---

---



|                                                |                                    
|----------------------------------------------- | -----------------------------------
|                                                | LANOPTICS LTD. AND ITS SUBSIDIARIES
|                                                |                                    
|NOTES TO
  CONSOLIDATED FINANCIAL STATEMENTS   
|                                                |                                    
|U.S.
  dollars in thousands (except share data) |                                    

|         |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------- | -------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3:- | INVESTMENT IN EZCHIP
|         |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | a.                   | In March
  2003, EZchip issued to the Company and to third parties 16,542,267 Series C
  Redeemable Preferred Shares, in consideration of $13,500. The net
  amount of $10,928, which was invested by third parties, was recorded as
  Redeemable Preferred Shares in EZchip.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | b.                   | In March
  2004, EZchip issued an additional 9,802,825 Series C Redeemable Preferred
  Shares to the Company and to third parties, for a total
  consideration of $8,000. The net amount of $2,563, which was invested by third
  parties, was recorded as Redeemable Preferred Shares in EZchip.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | c.                   | In July
  2005, EZchip issued an additional 12,253,531 Series C Redeemable Preferred Shares
  to the Company and to third parties, for a total consideration of $10,000.
  The net amount of $3,028, which was invested by third parties, was recorded
  as Redeemable Preferred Shares in EZchip.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | d.                   | In August
  2006, EZchip issued an additional 910,000 Series C
  Redeemable Preferred Shares to third parties in connection with a loan
  (see Note 12). The fair value of the shares was recorded as Redeemable
  Preferred Shares in EZchip.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | e.                   | Pursuant to
  the terms of the Series C Redeemable Preferred Shares, after March 2007,
  holders of majority of the shares of Series C Redeemable Preferred Shares of
  EZchip may request redemption of the shares. If redemption is requested, the
  shares are to be redeemed at a price per share equal to the greater of (a)
  the original Series C Redeemable Preferred 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. Following
  the Companys acquisitions of 9,524,388 Series C Redeemable Preferred Shares
  on June 23, 2005 and on December 22, 2006 (see Note 3h), the Company held a
  majority of the outstanding Series C Redeemable Preferred Shares. As a
  result, a redemption request could not have been delivered to EZchip without the
  consent of the Company after December 22, 2006.
|         |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |                      | On January 22, 2008, the Company acquired
  the remaining outstanding Series C Redeemable
  Preferred Shares, and currently holds all the outstanding Series C
  Redeemable Preferred Shares (see Note 19).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-25

---

---



|                                                |                                    
|----------------------------------------------- | -----------------------------------
|                                                | LANOPTICS LTD. AND ITS SUBSIDIARIES
|                                                |                                    
|NOTES TO
  CONSOLIDATED FINANCIAL STATEMENTS   
|                                                |                                    
|U.S.
  dollars in thousands (except share data) |                                    

|         |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------- | ---------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3:- | INVESTMENT IN EZCHIP (CONT.)
|         |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | f.                           | In May 2003,
  the Company executed an agreement with the four largest minority shareholders
  of EZchip, pursuant to which the Company offered them the right to
  exchange all their shares in EZchip for Ordinary Shares of the
  Company. The exchange right was contingent upon at least two of the
  shareholders electing to exchange their EZchips shares for Ordinary Shares
  of the company in accordance with the agreed terms.                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                              | On December
  22, 2006, two of the four shareholders exercised their right to exchange
  their EZchip shares for the Companys Ordinary Shares (see Note 3h). On
  January 22, 2008, the remaining two shareholders exercised their right to
  exchange their EZchip shares for the Companys Ordinary Shares (see Note 19).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|         |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | g.                           | On June 23,
  2005, the Company acquired 2,378,924 Ordinary Shares, 831,667 Preferred A
  Shares, 110,619 Preferred B Shares and 245,070 Redeemable Preferred C Shares
  of EZchip, in consideration of the issuance of 1,006,486 Ordinary Shares of
  the Company. The total fair value of the Company Ordinary Shares issued for
  the acquisition was $7,967 based on the average share prices of the Company
  Ordinary Shares two days before and two days after the announcement.                                                                                                                                                                                                                                                                                                                                                      
|         |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | h.                           | Following
  the election of two Major Shareholders to exchange their Preferred Shares of
  EZchip for Company Ordinary Shares, on December 22, 2006, the Company
  acquired 4,166,666 Preferred A Shares, 1,106,194 Preferred B Shares and
  7,909,811 Redeemable Preferred C Shares of EZchip, in consideration of the
  issuance of 3,521,566 Ordinary Shares of the Company. On December 22, 2006,
  the Company also acquired from the Lenders (as described in Note 12 below)
  1,369,507 Redeemable Preferred C Shares of EZchip in consideration of the
  issuance of 356,669
  Ordinary Shares of the Company. The total fair value of the Company
  Ordinary Shares issued for the acquisition was $55,672 based on the average
  share prices of the Company Ordinary Shares two days before and two days
  after the announcement.

F-26

---

---



|                                               
|-----------------------------------------------
|LANOPTICS LTD. AND ITS SUBSIDIARIES            
|                                               
|NOTES TO
  CONSOLIDATED FINANCIAL STATEMENTS   
|                                               
|U.S.
  dollars in thousands (except share data)

|         |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------- | ---------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3:- | INVESTMENT IN EZCHIP (CONT.)
|         |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | i.                           | In August
  2007, the Company offered current and former employees of EZchip that hold
  ordinary shares of EZchip and options to purchase ordinary shares of EZchip,
  to purchase a portion of their EZchip ordinary shares (including those
  resulting from the exercise of options). As a result, during August and
  September 2007 (herein the September 23, 2007 transaction), the Company
  acquired 4,374,458 ordinary shares of EZchip for a total consideration of
  $17,887.
|         |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         | j.                           | Each of the
  EZchip share acquisitions was accounted for according to the purchase method
  of accounting, in accordance with SFAS No. 141, and
  accordingly, the respective purchase price was allocated to the assets
  acquired and liabilities assumed based upon their estimated fair values at
  the respective dates of acquisition.                                                                                                                                              
|         |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|         |                              | The purchase
  price allocations are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                          |  |                    |        |                   |   |              |  |   |       | 
|----------------------------------------- |  | ------------------ | ------ | ----------------- | - | ------------ |  | - | ----- | 
|Purchase price allocation                 |  | September 23, 2007 |        | December 22, 2006 |   | June 23,2005 | 
|                                          |  |                    |        |                   |   |              | 
|                                          |  |                    |        |                   |   |              | 
|EZchips
  tangible assets acquired:      |  | $                  | 4,138  |                   | $ | 18,808       |  | $ | 1,142 | 
|Intangible
  assets acquired:             |  |                    |        |                   |   |              |  |   |       | 
|In-process
  research and development (1) |  |                    | 396    |                   |   | 2,033        |  |   | 1,475 | 
|Existing
  technology (2)                 |  |                    | 205    |                   |   | 2,752        |  |   | 517   | 
|Backlog (3)                               |  |                    | 6      |                   |   | 240          |  |   |      | 
|Customer
  base (4)                       |  |                    | 140    |                   |   | 141          |  |   |      | 
|Goodwill (5)                              |  |                    | 13,002 |                   |   | 31,698       |  |   | 4,833 | 
|                                          |  |                    |        |                   |   |              |  |   |       | 
|                                          |  |                    |        |                   |   |              |  |   |       | 
|Total
  consideration                     |  | $                  | 17,887 |                   | $ | 55,672       |  | $ | 7,967 | 
|                                          |  |                    |        |                   |   |              |  |   |       | 

| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (1) | The Company
  recorded a charge of $396 with respect to the September 23, 2007 shares
  acquisition, a charge of $2,033 with respect to the December 22, 2006 shares
  acquisition and a charge of $1,475 with respect to the June 23, 2005 shares
  acquisition, related to in-process research and development for projects
  which have not yet reached technological feasibility and which have no
  alternative future use.
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | (2) | The existing
  technology is amortized using the straight-line method over its useful life,
  which is up to 4 years.                                                                                                                                                                                                                                                                                                           
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | (3) | The backlog
  is amortized according to a shipment schedule, which calls for shipments
  during 2007.                                                                                                                                                                                                                                                                                                                           
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | (4) | The customer
  base is amortized over its useful life, which is 5 years.                                                                                                                                                                                                                                                                                                                                                        
| |  |     |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | (5) | Goodwill in
  the amount of $13,002 related to the September 23, 2007 shares acquisition,
  $31,698 related to the December 22, 2006 shares acquisition and $4,833
  related to the June 23, 2005 shares acquisition represents the excess of the
  purchase price over the fair value of the net assets acquired. Goodwill will
  not be amortized and will be tested for impairment at least annually.                        

F-27

---

---



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

|         |                                                                                                            
|-------- | -----------------------------------------------------------------------------------------------------------
|NOTE 4:- | MARKETABLE SECURITIES                                                                                      
|         |                                                                                                            
|         | As of
  December 31, 2007 and 2006 all of the Companys securities were classified as
  available-for-sale.

|                    |  |                   |        |                         |   |              |   |                 |        |                         |   |              |  |   |     |   |   |       | 
|------------------- |  | ----------------- | ------ | ----------------------- | - | ------------ | - | --------------- | ------ | ----------------------- | - | ------------ |  | - | --- | - | - | ----- | 
|                    |  | December 31, 2007 |        | December 31, 2006       |  
|                    |  |                   |        |                         |  
|                    |  | Amortized costs   |        | Gross unrealized losses |   | Market value |   | Amortized costs |        | Gross unrealized losses |   | Market value | 
|                    |  |                   |        |                         |   |              |   |                 |        |                         |   |              | 
|                    |  |                   |        |                         |   |              |   |                 |        |                         |   |              |  |   |     |   |   |       | 
|Available-for-sale: |  |                   |        |                         |   |              |   |                 |        |                         |   |              |  |   |     |   |   |       | 
|Corporate debts     |  | $                 | 11,167 |                         | $ | (11          | ) | $               | 11,156 |                         | $ | 5,491        |  | $ | (19 | ) | $ | 5,472 | 
|                    |  |                   |        |                         |   |              |   |                 |        |                         |   |              |  |   |     |   |   |       | 
|                    |  |                   |        |                         |   |              |   |                 |        |                         |   |              |  |   |     |   |   |       | 
|Total               |  | $                 | 11,167 |                         | $ | (11          | ) | $               | 11,156 |                         | $ | 5,491        |  | $ | (19 | ) | $ | 5,472 | 
|                    |  |                   |        |                         |   |              |   |                 |        |                         |   |              |  |   |     |   |   |       | 

| |                                                                                      
| | -------------------------------------------------------------------------------------
| | As of
  December 31, 2007, the Companys securities had the following maturity dates:

|                    |  |                   |        |              |   |        | 
|------------------- |  | ----------------- | ------ | ------------ | - | ------ | 
|                    |  | December 31, 2007 |       
|                    |  |                   |       
|                    |  | Amortized cost    |        | Market value |  
|                    |  |                   |        |              |  
|                    |  |                   |        |              |   |        | 
|Available-for-sale: |  |                   |        |              |   |        | 
|2008                |  | $                 | 6,055  |              | $ | 6,053  | 
|2009                |  |                   | 1,013  |              |   | 1,008  | 
|2010                |  |                   | 3,554  |              |   | 3,549  | 
|2011                |  |                   | 545    |              |   | 546    | 
|                    |  |                   |        |              |   |        | 
|Total               |  | $                 | 11,167 |              | $ | 11,156 | 
|                    |  |                   |        |              |   |        | 

|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | For the
  years ended December 31, 2007, 2006 and 2005, the realized gain amounted to
  $8, $17 and $48, respectively.                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | For the year
  ended December 31, 2007, unrealized losses in the
  Companys investments in corporate debt instruments are mainly
  attributed to interest rate fluctuations. As the Company has the ability to
  hold these investments until maturity it is expected that these securities
  would not be
  settled at a price less than the amortized cost of the Companys investment.
  Therefore, the debt instruments were not considered to be other
  than temporarily impaired at December 31, 2007.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|NOTE 5:- | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                 |  |              |       |      |   |     | 
|-------------------------------- |  | ------------ | ----- | ---- | - | --- | 
|                                 |  | December 31, |      
|                                 |  |              |      
|                                 |  | 2007         |       | 2006 |  
|                                 |  |              |       |      |  
|                                 |  |              |       |      |   |     | 
|Government authorities           |  | $            | 203   |      | $ | 331 | 
|Prepaid
  expenses               |  |              | 235   |      |   | 309 | 
|Grants
  receivable from the OCS |  |              | 524   |      |   |    | 
|Others                           |  |              | 218   |      |   | 43  | 
|                                 |  |              |       |      |   |     | 
|Total                            |  | $            | 1,180 |      | $ | 683 | 
|                                 |  |              |       |      |   |     | 

F-28

---

---



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

|         |            
|-------- | -----------
|NOTE 6:- | INVENTORIES

|                    |  |              |       |      |   |       | 
|------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                    |  | December 31, |      
|                    |  |              |      
|                    |  | 2007         |       | 2006 |  
|                    |  |              |       |      |  
|                    |  |              |       |      |   |       | 
|Raw
  materials     |  | $            | 258   |      | $ | 416   | 
|Work in
  progress  |  |              | 107   |      |   | 284   | 
|Finished
  products |  |              | 2,744 |      |   | 2,789 | 
|                    |  |              |       |      |   |       | 
|Total               |  | $            | 3,109 |      | $ | 3,489 | 
|                    |  |              |       |      |   |       | 

|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                     
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 7:- | PREPAID DEVELOPMENT AND PRODUCTION COSTS, NET                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | 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 was also obligated to 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Production:
  Access to unique semiconductor communications cores and technologies.                                                                                 
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                     
|         | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Development:
  IBM agreed 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 in accordance with EITF 00-18 Accounting
  Recognition for Certain Transactions involving Equity Instruments Granted to
  Other Than Employees (EITF 00-18).                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | The Ordinary
  Shares that were issued were valued in accordance with
  EZchips fair value estimation at the date of this agreement.
  Accordingly, prepaid costs totaling $2,134 were allocated between prepaid
  development services of $1,500, and prepaid production services of $634.
  Development costs were amortized upon achievement of milestones determined
  in the agreement. As of December 31, 2003 the development costs were fully
  amortized.                                
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | 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 estimated units to be manufactured.                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         | For the
  years ended December 31, 2007, 2006 and 2005, amortization expenses related
  to the production cost amounted to $142, $91 and $95, respectively.                                                                                                                                                                                                                                                                                                                                        

F-29

---

---



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

|         |                            
|-------- | ---------------------------
|NOTE 8:- | PROPERTY AND EQUIPMENT, NET

|                                               |  |              |       |      |   |       | 
|---------------------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                                               |  | December 31, |      
|                                               |  |              |      
|                                               |  | 2007         |       | 2006 |  
|                                               |  |              |       |      |  
|                                               |  |              |       |      |   |       | 
|Cost:                                          |  |              |       |      |   |       | 
|Office furniture and equipment                 |  | $            | 16    |      | $ | 11    | 
|Computers, software and electronic
  equipment |  |              | 3,915 |      |   | 3,623 | 
|Leasehold improvements                         |  |              | 64    |      |   | 57    | 
|                                               |  |              |       |      |   |       | 
|Total cost                                     |  |              | 3,995 |      |   | 3,691 | 
|                                               |  |              |       |      |   |       | 
|                                               |  |              |       |      |   |       | 
|Accumulated
  depreciation:                    |  |              |       |      |   |       | 
|Office furniture and equipment                 |  |              | 3     |      |   | 2     | 
|Computers, software and electronic
  equipment |  |              | 3,552 |      |   | 3,301 | 
|Leasehold improvements                         |  |              | 46    |      |   | 36    | 
|                                               |  |              |       |      |   |       | 
|Total
  accumulated depreciation               |  |              | 3,601 |      |   | 3,339 | 
|                                               |  |              |       |      |   |       | 
|                                               |  |              |       |      |   |       | 
|Depreciated
  cost                             |  | $            | 394   |      | $ | 352   | 
|                                               |  |              |       |      |   |       | 

|         |                                                                                                                               
|-------- | ------------------------------------------------------------------------------------------------------------------------------
|         | Depreciation
  expenses for the years ended December 31, 2007, 2006 and 2005,
  amounted to $265, $230 and $239, respectively.
|        
|NOTE 9:- | INTANGIBLE ASSETS, NET                                                                                                        

|                                 |  |              |       |      |   |       | 
|-------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                                 |  | December 31, |      
|                                 |  |              |      
|                                 |  | 2007         |       | 2006 |  
|                                 |  |              |       |      |  
|                                 |  |              |       |      |   |       | 
|Cost:                            |  |              |       |      |   |       | 
|Existing technology              |  | $            | 4,677 |      | $ | 4,472 | 
|Customer Base                    |  |              | 281   |      |   | 141   | 
|Backlog                          |  |              | 246   |      |   | 240   | 
|                                 |  |              |       |      |   |       | 
|Total cost                       |  | $            | 5,204 |      | $ | 4,853 | 
|                                 |  |              |       |      |   |       | 
|                                 |  |              |       |      |   |       | 
|Accumulated
  amortization:      |  |              |       |      |   |       | 
|Existing technology              |  |              | 2,180 |      |   | 1,219 | 
|Customer Base                    |  |              | 42    |      |   | 1     | 
|Backlog                          |  |              | 246   |      |   |      | 
|                                 |  |              |       |      |   |       | 
|Total
  accumulated amortization |  |              | 2,468 |      |   | 1,220 | 
|                                 |  |              |       |      |   |       | 
|                                 |  |              |       |      |   |       | 
|Amortized
  cost                 |  | $            | 2,736 |      | $ | 3,633 | 
|                                 |  |              |       |      |   |       | 

| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Amortization
  expenses for the years ended December 31, 2007, 2006 and 2005, amounted
  to $1,248, $361 and $291, respectively.
| |                                                                                                                                 
| | Following is
  the estimated amortization expenses in respect of identifiable intangible
  assets:                              

|                        |  |   |     | 
|----------------------- |  | - | --- | 
|Year ended December 31, |  |   |     | 
|                        |  |   |     | 
|                        |  |   |     | 
|2008                    |  | $ | 909 | 
|2009                    |  | $ | 908 | 
|2010                    |  | $ | 838 | 
|2011                    |  | $ | 54  | 
|2012                    |  | $ | 27  | 

F-30

---

---



|                                               
|-----------------------------------------------
|LANOPTICS LTD. AND ITS SUBSIDIARIES            
|                                               
|NOTES TO
  CONSOLIDATED FINANCIAL STATEMENTS   
|                                               
|U.S.
  dollars in thousands (except share data)

|          |         
|--------- | --------
|NOTE 10:- | GOODWILL

|                                                                                                  |  |   |        | 
|------------------------------------------------------------------------------------------------- |  | - | ------ | 
|The following table presents details of the
  Companys total goodwill:                           |  |   |        | 
|                                                                                                  |  |   |        | 
|As of December 31, 2005                                                                           |  | $ | 4,833  | 
|Goodwill resulted from EZchip shares
  acquisition dated December 22, 2006 (see Notes 3h and 3j)  |  |   | 31,698 | 
|                                                                                                  |  |   |        | 
|As of December 31, 2006                                                                           |  |   | 36,531 | 
|                                                                                                  |  |   |        | 
|Goodwill resulted from EZchip shares
  acquisition dated September 23, 2007 (see Notes 3i and 3j) |  |   | 13,002 | 
|                                                                                                  |  |   |        | 
|                                                                                                 
|As of December 31, 2007                                                                           |  | $ | 49,533 | 
|                                                                                                  |  |   |        | 

|          |                                            
|--------- | -------------------------------------------
|NOTE 11:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

|                                 |  |              |       |      |   |       | 
|-------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|                                 |  | December 31, |      
|                                 |  |              |      
|                                 |  | 2007         |       | 2006 |  
|                                 |  |              |       |      |  
|                                 |  |              |       |      |   |       | 
|Employees
  and payroll accruals |  | $            | 1,887 |      | $ | 1,507 | 
|Accrued
  expenses               |  |              | 1,502 |      |   | 1,228 | 
|Deferred
  revenues              |  |              | 135   |      |   | 357   | 
|                                 |  |              |       |      |   |       | 
|                                 |  | $            | 3,524 |      | $ | 3,092 | 
|                                 |  |              |       |      |   |       | 

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12:- | LONG-TERM LOAN, NET                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | In August
  2006, EZchip entered into a Credit Agreement (the Credit Agreement) with
  third parties (the Lenders) pursuant to which the Lenders agreed to make a
  $4,000 line of credit available to EZchip, which may be increased
  by an additional $2,000 upon EZchips achievement of certain milestones.                                                                                                                                                                                                                                                                                 
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | Under the
  terms of the Credit Agreement, EZchip was permitted to draw amounts under the
  line of credit from time to time until August 2007 at which time the drawn
  and unpaid amount principal was fixed and the revolving line of credit
  facility became a loan (the Loan). In August 2007, the balance of the Loan
  was $4,000.                                                                                                                                                                                                                                                         
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | The Loan had
  an annual interest rate of LIBOR+3% for the first two years and LIBOR+4.5% for the
  third year. The principal of the Loan was required to be repaid in 12 equal
  monthly payments, commencing August 2008. During October 2007,
  EZchip repaid the full Loan amount in an early repayment. According to the
  Credit Agreement, the Company had a right to settle the loan principal amount
  in an early repayment.                                                                                                                                                               
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | As part of
  the Credit Agreement, EZchip issued to the Lenders 910,000 Series C
  Redeemable Preferred Shares. The Series C Redeemable Preferred Shares
  were recorded at fair value and were presented as a discount on the Loan in
  the amount of $743. The discount on the Loan has been amortized according to
  the effective interest method as financial expenses over the loan contractual
  life which is 3 years. Since the Company settled the Loan in an
  early repayment, the outstanding discount amount was fully amortized at the
  date of the repayment as a financial expense.

F-31

---

---



|                                               
|-----------------------------------------------
|LANOPTICS LTD. AND ITS SUBSIDIARIES            
|                                               
|NOTES TO
  CONSOLIDATED FINANCIAL STATEMENTS   
|                                               
|U.S.
  dollars in thousands (except share data)

|          |                                        |                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                  
|--------- | -------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12:- | LONG-TERM LOAN, NET (CONT.)           
|         
|          |                                        | As a part of
  this Credit Agreement, EZchip granted the Lenders a first ranking floating
  charge on all EZchips present and future tangible and intangible assets and
  rights to secure the Loan. That floating charge was removed following the
  early repayment of the Loan.
|          |                                        |                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                  
|          |                                        | The 910,000
  Series C Redeemable Preferred Shares in EZchip were acquired by the Company
  in December 2006, in exchange for Company Ordinary Shares (see Note 3h).                                                                                                               
|          |                                        |                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                  
|NOTE 13:- | COMMITMENTS AND CONTINGENT LIABILITIES
|          |                                        |                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                  
|          | a.                                     | Lease
  commitments:                                                                                                                                                                                                                                                               
|          |                                        |                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                  
|          |                                        | 1.                                                                                                                                                                                                                                                                                  | The Company
  and its subsidiary lease their facilities under operating lease agreements,
  which will expire in January 2009. The minimum lease payments under
  non-cancelable operating leases are as follows:

|                          |  |   |     | 
|------------------------- |  | - | --- | 
|Year ended
  December 31, |  |   |     | 
|                          |  |   |     | 
|                          |  |   |     | 
|2008                      |  | $ | 417 | 
|2009                      |  |   | 35  | 
|                          |  |   |     | 
|                          |  | $ | 452 | 
|                          |  |   |     | 

| |  |    |                                                                                                                                                                                                
| |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    | In the event
  the Company will decide to terminate the operating lease agreement, it must
  provide 90 days prior notice.                                                                     
| |  |    |                                                                                                                                                                                                
| |  |    | EZchip
  leases two offices in the U.S. under lease agreement, which it renews every
  six months for a monthly payment of $6.                                                                 
| |  |    |                                                                                                                                                                                                
| |  |    | Total rent
  expenses for the Company and for its subsidiaries, for the years ended
  December 31, 2007, 2006 and 2005, amounted to $420, $420 and $419,
  respectively.                       
| |  |    |                                                                                                                                                                                                
| |  | 2. | The Company
  and EZchip lease motor vehicles under operating lease agreements, which will
  expire in 2010. The minimum lease payments under non-cancelable operating
  leases are as follows:

|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Year ended
  December 31, |  |   |       | 
|                          |  |   |       | 
|                          |  |   |       | 
|2008                      |  | $ | 601   | 
|2009                      |  |   | 492   | 
|2010                      |  |   | 240   | 
|                          |  |   |       | 
|                          |  | $ | 1,333 | 
|                          |  |   |       | 

| |  |  |                                                                                                                                                                                    
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | The Company
  can terminate the motor vehicle lease agreement before 2010, by compensation
  of one to three months charges for leasing contracts that are less than three
  years.
| |  |  |                                                                                                                                                                                    
| |  |  | Lease motor
  vehicles expenses for the years ended December 31, 2007, 2006 and 2005,
  amounted to $934, $767 and $605, respectively.                                             

F-32

---

---



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

|          |                                                |                                                                                                                                                                                                                                                                                                 | 
|--------- | ---------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 13:- | COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
|          |                                                |                                                                                                                                                                                                                                                                                                 | 
|          | b.                                             | Royalties
  commitments:                                                                                                                                                                                                                                                                       
|          |                                                |                                                                                                                                                                                                                                                                                                 | 
|          |                                                | EZchip is
  participating in programs sponsored by the Office of the Chief Scientist of
  the Ministry of Industry, Trade and Labor of Israel (OCS) for the support
  of research and development activities.                                                                                
|          |                                                |                                                                                                                                                                                                                                                                                                 | 
|          |                                                | In 2007 and
  2006, EZchip received an approval from the OCS for its participation in its
  research and development budget. Pursuant to such program, the OCS will
  participate in 50% of the approved budgets for certain periods ending
  December 31, 2007.                               
|          |                                                |                                                                                                                                                                                                                                                                                                 | 
|          |                                                | In
  connection with the grant, EZchip is obligated to pay royalties to the OCS
  calculated at the rate of 4%-4.5% of sales of the products developed with the
  OCSs participation up to 100% of the grants received linked to the U.S.
  dollar bearing annual interest at a rate of LIBOR.
|          |                                                |                                                                                                                                                                                                                                                                                                 | 
|          |                                                | As of
  December 31, 2007, the cumulative amount of royalty bearing participations
  received by EZchip and the resulting contingent obligation to pay royalties
  was $2,612.                                                                                                                 

|          |                      |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------- | -------------------- | ------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14:- | SHAREHOLDERS EQUITY
|          |                      |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          | a.                   | Companys
  shares:
|          |                      |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                      | 1.                  | As of
  December 31, 2007, the Companys authorized share capital consists of NIS
  1,000,000 divided into 50,000,000 Ordinary Shares, par value NIS 0.02 per
  share. On December 27, 2007, the share capital of the Company increased by
  NIS 400,000, or 20,000,000 Ordinary Shares, par value NIS 0.02 per share.
  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.                  | During
  August and September 2007, the Company issued 2,500,000 Ordinary Shares for
  total consideration of $43,627, less of issuance costs of $150. Part of the
  proceeds was used to increase the Companys ownership interest in EZchip (see
  also Note 3i).                                                                                                                                                                                                                                                                                                                          
|          |                      |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                      | 3.                  | During 2006
  and 2005, the Company issued 3,828,235 and 1,006,486 Ordinary Shares,
  respectively, in connection with the acquisition of EZchip shares (see also
  Notes 3g and 3h).                                                                                                                                                                                                                                                                                                                                                                                                        

F-33

---

---



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

|          |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|--------- | ---------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 14:- | SHAREHOLDERS EQUITY (CONT.)
|          |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|          | b.                           | Companys
  stock option plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|          |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|          |                              | In October
  2003, the Company adopted the 2003 Israeli Share Option Plan. In December
  2006 the plan was amended to reflect the possible grants of restricted share
  units (herein- RSU) and renamed as the LanOptics Ltd. 2003 Amended and
  Restated Equity Incentive Plan (the 2003 Israel Plan). Up to 1,770,000
  Ordinary Shares may be granted under the 2003 Israel Plan, which amount is
  reduced by three shares for each RSU granted under the plan and by one share
  for each option granted under the plan. In addition, pursuant to amendment to
  the 2003 Israel Plan approved by the Companys shareholders in December 2007,
  on January 1st of each year, commencing January 1, 2009, to the extent the
  number of Ordinary Shares reserved, authorized and available for issuance
  under the 2003 Israel Plan on such date is less than 4% of the number of
  Ordinary Shares issued and outstanding on such date, the number of Ordinary
  Shares reserved, authorized and available for issuance under the 2003 Israel
  Plan will automatically increase on such date to equal 4% of the number of
  Ordinary Shares issued and outstanding on such date. Awards 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 awards granted to have a maximum exercise period of ten
  years from the date of grant. Awards that will be granted under the 2003
  Israel Plan will be generally exercisable over four years. Awards that are
  not exercised will become available for future grants. As of December 31,
  2007 there were 86,000 options and 29,250 restricted share units outstanding
  under the 2003 Israel Plan.
|          |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|          |                              | On December
  27, 2007, the Company adopted the 2007 U.S. Equity Incentive Plan (the 2007
  U.S. Plan). Up to 500,000 Ordinary Shares may be granted under the 2007 U.S.
  Plan, which amount is reduced by three shares for each RSU granted under the
  plan and by one share for each option that the Company grants under the plan.
  Except as required to address specific U.S. tax requirements, the general
  terms and conditions of the 2007 U.S. Plan are substantially similar to the
  terms and conditions of the 2003 Israel Plan. As of December 31, 2007, no
  awards were granted under the 2007 U.S. Equity Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|          |                              | Transactions
  related to the grant of options to employees under the above plans during the
  years ended December 31, 2007,
  2006 and 2005,
  were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                   |  |                         |          |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |      | 
|---------------------------------- |  | ----------------------- | -------- | ------------------------------------- | - | ------------------- |  | ------------------------------------- | -------- | ------------------- | - | ------------------------------------- |  |  | ------- | - | - | ---- | 
|                                   |  | Year ended December 31, |         
|                                   |  |                         |         
|                                   |  | 2007                    |          | 2006                                  |   | 2005                | 
|                                   |  |                         |          |                                       |   |                     | 
|                                   |  | Number
  of options     |          | Weighted
  average
  exercise
  price |   | Number
  of options |  | Weighted
  average
  exercise
  price |          | Number
  of options |   | Weighted
  Average
  exercise
  price | 
|                                   |  |                         |          |                                       |   |                     |  |                                       |          |                     |   |                                       | 
|                                   |  |                         |          |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |      | 
|Outstanding at beginning of year   |  |                         | 147,652  |                                       | $ | 4.46                |  |                                       | 305,239  |                     | $ | 5.00                                  |  |  | 306,239 |   | $ | 4.99 | 
|                                   |  |                         |          |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |      | 
|Granted                            |  |                         | 81,000   |                                       | $ | 12.23               |  |                                       |         |                     |   |                                      |  |  |        |   |   |     | 
|Exercised                          |  |                         | (142,652 | )                                     | $ | 4.37                |  |                                       | (157,587 | )                   | $ | 5.51                                  |  |  | (1,000  | ) | $ | 2.50 | 
|                                   |  |                         |          |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |      | 
|Outstanding at end of year         |  |                         | 86,000   |                                       | $ | 11.92               |  |                                       | 147,652  |                     | $ | 4.46                                  |  |  | 305,239 |   | $ | 5.00 | 
|                                   |  |                         |          |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |      | 
|Exercisable options at end of year |  |                         | 41,000   |                                       | $ | 11.58               |  |                                       | 147,652  |                     | $ | 4.46                                  |  |  | 295,239 |   | $ | 4.77 | 
|                                   |  |                         |          |                                       |   |                     |  |                                       |          |                     |   |                                       |  |  |         |   |   |      | 

F-34

---

---



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

|          |                              |                                                                                                                                                     | 
|--------- | ---------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 14:- | SHAREHOLDERS EQUITY (CONT.)
|          |                              |                                                                                                                                                     | 
|          | b.                           | Companys
  stock option plans (cont.):                                                                                                            
|          |                              |                                                                                                                                                     | 
|          |                              | The
  following table summarizes information relating to awards of restricted
  shares units. No restricted share units were granted prior to 2007:

|                                   |  |                         |        |                                                 |   |       | 
|---------------------------------- |  | ----------------------- | ------ | ----------------------------------------------- | - | ----- | 
|                                   |  | Year ended December 31, |       
|                                   |  |                         |       
|                                   |  | 2007                    |       
|                                   |  |                         |       
|                                   |  | Number
  of shares      |        | Weighted
  average
  fair value at
  grant date |  
|                                   |  |                         |        |                                                 |  
|                                   |  |                         |        |                                                 |   |       | 
|Outstanding at beginning of year   |  |                         |       |                                                 | $ |      | 
|                                   |  |                         |        |                                                 |   |       | 
|Granted                            |  |                         | 29,250 |                                                 | $ | 15.99 | 
|Outstanding at end of year         |  |                         | 29,250 |                                                 | $ | 15.99 | 
|                                   |  |                         |        |                                                 |   |       | 
|Exercisable options at end of year |  |                         | 12,000 |                                                 | $ | 12.23 | 
|                                   |  |                         |        |                                                 |   |       | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | The intrinsic value of exercisable options (the difference between
  the Companys closing share price on the last trading day in fiscal 2007 and the exercise price, multiplied by
the number of
  in-the-money options) represents the amount that would have been received by
  the option holders had all option holders exercised their options on December
  31, 2007. This amount changes based on the fair
  market value of the Companys shares. Total intrinsic value of exercisable
  options and restricted shares units as of December 31, 2007 was $262 and
  $220, respectively. Total intrinsic value of outstanding options and
  restricted shares units as of December 31, 2007 was $550 and $536,
  respectively
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| |  | Aggregate intrinsic value, at the date of exercise, of options that
  were exercised during the year ended December 31, 2007 was $1,383.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| |  | As of December 31, 2007, there was $578 of total unrecognized
  compensation cost related to non-vested share-based compensation arrangements
  granted under the plans. That cost is expected to be recognized over a
  weighted average period of two years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| |  | The following table illustrates the assumptions that had been used in
  calculating the fair value for options granted in the Company during 2007.
  These options are amortized over their vesting period and their fair value
  was estimated at the date of grant using the Black-Scholes pricing model:                                                                                                                                                                                                                                                                                                                                                                                                                          

|                       |  |                                  |           | 
|---------------------- |  | -------------------------------- | --------- | 
|                       |  | Year ended
  December 31,
  2007 |          
|                       |  |                                  |          
|                       |  |                                  |           | 
|Dividend yield         |  |                                  | 0%        | 
|Expected volatility    |  |                                  | 60%       | 
|Risk-free interest     |  |                                  | 4.60%     | 
|Expected life of up to |  |                                  | 3.3 years | 

F-35

---

---



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

|          |                              |                                                                                                        | 
|--------- | ---------------------------- | ------------------------------------------------------------------------------------------------------ | 
|NOTE 14:- | SHAREHOLDERS EQUITY (CONT.)
|          |                              |                                                                                                        | 
|          | b.                           | Companys
  stock option plans (cont.):                                                               
|          |                              |                                                                                                        | 
|          |                              | The options outstanding as of December 31, 2007, have been separated
  by exercise prices, as follows:

|                 |  |  |                                                   |  |  |                                                         |  |  |                                                   | 
|---------------- |  |  | ------------------------------------------------- |  |  | ------------------------------------------------------- |  |  | ------------------------------------------------- | 
|Exercise
  price |  |  | Options
  outstanding as of
  December 31,
  2007 |  |  | Weighted
  average remaining
  contractual
  life years |  |  | Options
  exercisable as of
  December 31,
  2007 | 
|                 |  |  |                                                   |  |  |                                                         |  |  |                                                   | 
|                 |  |  |                                                   |  |  |                                                         |  |  |                                                   | 
|$6.93            |  |  | 5,000                                             |  |  | 5.9                                                     |  |  | 5,000                                             | 
|$12.23           |  |  | 81,000                                            |  |  | 4.08                                                    |  |  | 36,000                                            | 
|                 |  |  |                                                   |  |  |                                                         |  |  |                                                   | 
|                 |  |  | 86,000                                            |  |  | 4.18                                                    |  |  | 41,000                                            | 
|                 |  |  |                                                   |  |  |                                                         |  |  |                                                   | 

|          |               |                                                                                    |                                                                                                                                                                                                                                                                                            
|--------- | ------------- | ---------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 15:- | EZCHIP SHARES
|          |               |                                                                                    |                                                                                                                                                                                                                                                                                            
|          | a.            | EZchip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 price, 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.                                                                             

F-36

---

---



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

|          |                      
|--------- | ---------------------
|NOTE 15:- | EZCHIP SHARES (CONT.)

| |    |                           
| | -- | --------------------------
| | a. | EZchips
  shares (cont.):

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 6. | Liquidation
  preference:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
| |    | The
  liquidation preference of the Preferred Shares includes the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
| |    | (a) First,
  each Series C Preferred Share shall entitle its holder to the original Series
  C per share issue price; (b) second, each Series B Preferred Share shall
  entitle its holder to the original Series B per share issue price; (c) third,
  each Series A Preferred Share shall entitle its holder to
  the original Series A per share issue price; (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; (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 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 liquidation 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
| |    | 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 Share 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.                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 7. | Redemption:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
| |    | At the
  request of the majority 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-37

---

---



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

|          |                      
|--------- | ---------------------
|NOTE 15:- | EZCHIP SHARES (CONT.)

| |    |                           
| | -- | --------------------------
| | a. | EZchips
  shares (cont.):

| |    |                                                                                                                                                                                  |                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------
| | 8. | Required
  consent:                                                                                                                                                             
| |    |                                                                                                                                                                                 
| |    | EZchips
  articles of incorporation require approval by a simple
  majority of its board of directors or shareholders for certain actions in the
  ordinary course of business.
| |    |                                                                                                                                                                                 
| |    | The consent
  of holders of a majority of Series C Preferred Shares shall be required to:                                                                                       
| |    |                                                                                                                                                                                  |                                                                                                                                      
| |    | -                                                                                                                                                                                | Change the
  rights and terms of the Series C Preferred Shares;                                                                      
| |    |                                                                                                                                                                                  |                                                                                                                                      
| |    | -                                                                                                                                                                                | Issue any
  security either senior to or on a parity with the Series C Preferred  Shares;                                            
| |    |                                                                                                                                                                                  |                                                                                                                                      
| |    | -                                                                                                                                                                                | Sell or
  merge EZchip (or any other corporate reorganization) or sell or  exclusively license a substantial portion
  of its assets;
| |    |                                                                                                                                                                                  |                                                                                                                                      
| |    | -                                                                                                                                                                                | Pay any dividend
  to or redeem any existing Preferred Shares or Ordinary Shares;                                                    
| |    |                                                                                                                                                                                  |                                                                                                                                      
| |    | -                                                                                                                                                                                | Change
  EZchips by-laws or articles of incorporation.                                                                              
| |    |                                                                                                                                                                                 
| | 9. | As of
  January 22, 2008, the Company owns all the outstanding Preferred Shares of
  EZchip and approximately 99% of the Ordinary Shares of EZchip (see Note 19).               

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | b. | EZchip stock 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 16,500,000
  Ordinary Shares of EZchip were 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
| |    | Following
  the acquisition (see also Note 19) by the Company of substantially all of
  EZchips shares, the Company discontinued its practice of granting EZchip
  employees options to purchase shares of EZchip pursuant to the EZchip option
  plans.  Instead, all future incentive
  awards to EZchip employees will consist of options or restricted share units
  to purchase Ordinary Shares of the Company.                                                                                                                                                                                                                                                                                                                                                      

F-38

---

---



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

|          |                      
|--------- | ---------------------
|NOTE 15:- | EZCHIP SHARES (CONT.)

| |    |                                                                                                                                                                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | EZchip stock
  option plans (cont.):                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                 
| |    | Grants for Twelve Months ended December 31, 2007 in EZchip:                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                 
| |    | EZchips
  Ordinary Share fair value was calculated by a third party appraiser and the
  weighted average price for 2007 and 2006 was $0.76 and $0.75, respectively.                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                 
| |    | The
  weighted-average estimated fair value of employee stock options granted in
  EZchip during the years ended December 31, 2007 and 2006 as calculated by a
  third party appraiser was $0.47, and $0.49, respectively per share using the Black
  and Scholes model with the following assumptions (annualized percentages):

|                            |  |                                |  |  |                                | 
|--------------------------- |  | ------------------------------ |  |  | ------------------------------ | 
|                            |  | Year ended
  December 31, 2007 |  |  | Year ended
  December 31, 2006 | 
|                            |  |                                |  |  |                                | 
|                            |  |                                |  | 
|Volatility                  |  | 75%                            |  |  | 77.5%-80%                      | 
|Risk-free interest rate     |  | 4.59%-4.77%                    |  |  | 4.36-5.04%                     | 
|Dividend yield              |  | 0%                             |  |  | 0%                             | 
|Pre vesting forfeiture rate |  | 1.7%                           |  |  | 1.7%                           | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | EZchip used
  peer companies stock price data for calculating volatility in accordance with
  SFAS 123(R), allowing exclusive reliance on historical volatility. The
  Company has no reason to believe that its future volatility for the expected
  or contractual term is likely to differ from the historical measures. The
  computation of historical volatility uses a simple average calculation
  method, a sequential period of historical data at least equal to the expected
  or contractual term of the employee stock option, and a reasonably sufficient
  number of price observations are used. As a result of the above-mentioned
  calculations, the weighted-average volatility used in the model for the year
  ended December 31, 2007 is 75%.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The
  risk-free interest is based on the yield from U.S. treasury bonds with an
  equivalent term in effect on the time of grant. The weighted average interest
  rate used for the year ended December 31, 2007 was 4.7%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The expected
  life of employee stock options represents the weighted-average period the
  stock options are expected to remain outstanding. The expected life for
  options granted in EZchip for the
  year ended December 31, 2007 is in the range from 2 to 4.7
  years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | EZchip is
  required to assume a dividend yield as an input in the Black and Scholes
  model. The dividend yield assumption is based on EZchips historical and
  expectation of future dividend payouts and may be subject to substantial
  change in the future. The dividend yield used for year ended December 31,
  2007 was 0%.                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The expected
  annual pre-vesting forfeiture rate affects the number of exercisable options.
  Based on EZchips historical experience, the annual pre-vesting forfeiture
  rate is 1.7%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-39

---

---



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

|          |                      
|--------- | ---------------------
|NOTE 15:- | EZCHIP SHARES (CONT.)

| |    |                                                                                
| | -- | -------------------------------------------------------------------------------
| | b. | EZchip stock
  option plans (cont.):                                           
| |    |                                                                                
| |    | The
  following table is a summary of activity for EZchips stock option plans:

Year ended December 31,2007

2006

2005Number
  of options

Weighted
  average
  exercise
  price

Number
  of options

Weighted
  average
  exercise
  price

Number
  of options

Weighted
  average
  exercise
  priceOutstanding at beginning of year


15,067,880

$
0.69


10,208,067

$
0.67


10,655,411

$
0.67Granted


2,981,000

$
0.43


5,359,000

$
0.75


231,500

$
0.79Exercised


(4,947,791
)
$
0.83


(194,375
)
$
0.89


(278,750
)
$
0.72Forfeited


(3,472,124
)
$
0.48


(304,812
)
$
0.80


(400,094
)
$
0.81Outstanding at end of year


9,628,965

$
0.68


15,067,880

$
0.69


10,208,067

$
0.67Exercisable options at end of year


5,727,378

$
0.64


9,517,985

$
0.76


8,128,806

$
0.71Vested and expected to vest


9,465,273

$
0.68


14,811,726

$
0.69


10,208,067

$
0.67


| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In May 2007,
  the Company granted certain employees 2,715,000 fully vested options to
  purchase ordinary shares of EZchip to replace fully vested expiring options
  that were not exercised by such employees prior to their respective
  expiration dates, bearing the same as the applicable expiring option.                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | In August
  2007, the Company offered current and former employees of EZchip that held
  ordinary shares of EZchip and options to purchase ordinary shares of EZchip,
  to purchase a portion of their EZchip ordinary shares (including those
  resulting from the exercise of options).
  As a result, during August and September 2007, current and former
  employees of EZchip exercised 4,296,120 options to purchase ordinary shares of EZchip and the Company
  acquired an aggregate of 4,374,458 ordinary shares of EZchip, including 4,296,120 ordinary shares of EZchip issued upon
  exercise of options by current and former employees of EZchip, for a total
  consideration in the amount of $17,887.
  See also Note 3i.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | As of December 31, 2007, there was
$1,652 of total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the plans. That cost is expected to be recognized
over a weighted average period of two years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



F-40

---

---



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

|          |                       |                                                                                                          
|--------- | --------------------- | ---------------------------------------------------------------------------------------------------------
|NOTE 15:- | EZCHIP SHARES (CONT.)
|          |                       |                                                                                                          
|          | b.                    | EZchip stock
  option plans (cont.):                                                                     
|          |                       |                                                                                                          
|          |                       | The options
  outstanding as of December 31, 2007, have been separated into exercise prices
  as follows:

|                |  |  |                                                     |  |  |                                                         |  |  |                                                     |  |  |                                                           | 
|--------------- |  |  | --------------------------------------------------- |  |  | ------------------------------------------------------- |  |  | --------------------------------------------------- |  |  | --------------------------------------------------------- | 
|Exercise price  |  |  | Options
  outstanding
  as of
  December 31,
  2007 |  |  | Weighted
  average remaining
  contractual
  life years |  |  | Options
  exercisable
  as of
  December 31,
  2007 |  |  | Weighted
  average
  remaining
  contractual
  life years | 
|                |  |  |                                                     |  |  |                                                         |  |  |                                                     |  |  |                                                           | 
|                |  |  |                                                     |  |  |                                                         |  |  |                                                     |  |  |                                                           | 
|$0.40           |  |  | 2,532,500                                           |  |  | 3.34                                                    |  |  | 2,532,500                                           |  |  | 3.34                                                      | 
|$0.72 -
  $0.78 |  |  | 5,253,531                                           |  |  | 5.93                                                    |  |  | 1,408,288                                           |  |  | 6.18                                                      | 
|$0.80 -
  $0.82 |  |  | 1,162,822                                           |  |  | 6.21                                                    |  |  | 1,106,478                                           |  |  | 6.17                                                      | 
|$1.00           |  |  | 680,112                                             |  |  | 1.73                                                    |  |  | 680,112                                             |  |  | 1.73                                                      | 
|                |  |  |                                                     |  |  |                                                         |  |  |                                                     |  |  |                                                           | 
|                |  |  |                                                     |  |  |                                                         |  |  |                                                     |  |  |                                                           | 
|                |  |  | 9,628,965                                           |  |  | 4.99                                                    |  |  | 5,727,378                                           |  |  | 4.39                                                      | 
|                |  |  |                                                     |  |  |                                                         |  |  |                                                     |  |  |                                                           | 

| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Weighted
  average fair values on the date of grant of options granted for the years
  ended December 31, 2007, 2006 and 2005 were $0.47, $0.49 and $0.44,
  respectively.

|          |                 |        
|--------- | --------------- | -------
|NOTE 16:- | TAXES ON INCOME
|          |                 |        
|          | a.              | FIN-48:

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company adopted the provisions of
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48), on January 1, 2007. As a result of the implementation of
Interpretation 48, the Company recognized an increase of approximately $222 in the
liability for unrecognized tax benefits, which was accounted for as an increase to the
January 1, 2007 balance of the accumulated deficit. The reconciliation of the beginning
and ending balances of the total amounts of gross unrecognized tax benefits was not
provided due to immateriality.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | In accordance with the Companys
accounting policy, both before and after adoption of FIN 48, interest expense and
potential penalties, if any, related to income taxes are included in the tax expense line
of the Companys consolidated statements of operations.                                                                                                                                                                                                                                                                                                    
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | As of December 31, 2007, the Company
had accrued, as a part of the cumulative effect of implementation of FIN 48, interest
liability related to uncertain tax positions in the amounts of $36, which is included
within income tax accrual on the balance sheet.                                                                                                                                                                                                                                                                                                        
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | The Company
  and its subsidiaries file federal and state income tax returns in the U.S.
  and Israel. LanOptics Ltd. and EZchip Ltd. (the Israeli subsidiary) may be
  subject to examination by the Israel tax authorities for fiscal years 2003
  through 2007. EZchip Inc. (the U.S. subsidiary) may be subject to examination
  by the U.S. Internal Revenue Service (IRS) for fiscal years 2002 through
  2007.                                                                                                                                                 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | The Company
  believes that it has adequately provided for any reasonably foreseeable
  outcome related to tax audits and settlement. The final tax outcome of the
  Companys tax audits could be different from what is reflected in the
  Companys income tax provisions and accruals. Such differences could have a
  material effect on the Companys income tax provision and net loss in the
  period in which such determination is made.                                                                                                                      

F-41

---

---



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

|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--------- | ----------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 16:- | TAXES ON INCOME (CONT.)
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          | b.                      | Reduction in
  Israeli tax rates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          |                         | For tax year
  2007, Israeli companies are subject to Corporate Tax on their taxable
  income at the rate of 29%. Following an amendment to the Israeli Income Tax
  Ordinance, 1961 (the Israeli Tax Ordinance), which came into effect on
  January 1,2006, the corporate tax rate is scheduled to decrease as follows:
  27% for the 2008 tax year,  26%  for the 2009 tax year and 25% for the 2010
  tax year and thereafter.  Israeli
  companies are generally subject to capital gains tax at a rate of 25% for
  capital gains (other than gains deriving from the sale of listed securities)
  derived after January 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          | c.                      | Measurement
  of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          |                         | Results for
  tax purposes are measured in terms of earnings in New Israeli Shekels (NIS)
  after certain adjustments for increases 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. 

On February 26, 2008, the Israeli
Parliament (the Knesset) enacted the Income Tax Law (Inflationary Adjustments) (Amendment
No. 20) (Restriction of Effective Period), 2008, which the Company refers to as the
Inflationary Adjustments Amendment. In accordance with the Inflationary Adjustments
Amendment, the effective period of the Inflationary Adjustments Law will cease at the end
of the 2007 tax year and as of the 2008 tax year the provisions of the law shall no longer
apply, other than the transitional provisions intended at preventing distortions in the
tax calculations. In accordance with the Inflationary Adjustments Amendment, commencing
the 2008 tax year, income for tax purposes will no longer be adjusted to a real (net of
inflation) measurement basis. Furthermore, the depreciation of inflation immune assets and
carried forward tax losses will no longer be linked to the Israeli consumer price index.
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          |                         | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          | d.                      | Tax benefits
  under the Law for the Encouragement of Capital Investments, 1959 (the Law):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          |                         | In 2000,
  EZchip Technologies Ltd. was granted Approved Enterprise status under
  the Law. Generally, Approved Enterprise tax benefits, are limited to
  12 years from commencement of production or 14 years from the date of
  approval, whichever is earlier.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          |                         | According to
  the provisions of the Law, EZchip has chosen to enjoy the Alternative
  Benefits track and, accordingly, its income from the Approved Enterprise
  is tax-exempt for a period of ten years, commencing in the first year EZchip
  has taxable income. The above mentioned years limitation does not apply to
  the exemption period. Due to the reported losses, the benefit period has not
  commenced. The entitlement to the above benefits is conditional upon EZchip
  fulfilling the conditions stipulated by the above Law, regulations published
  thereunder 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          |                         | As of
  December 31, 2007, 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 10%
  to 25% of the amount distributed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-42

---

---



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

|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--------- | ----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 16:- | TAXES ON INCOME (CONT.)
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          | d.                      | Tax benefits
  under the Law for the Encouragement of Capital Investments, 1959 (the Law)
  (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         | The
  tax-exempt income attributable to the Approved Enterprise can be
  distributed to shareholders without subjecting EZchip to taxes only upon the
  complete liquidation of EZchip. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         | On April 1,
  2005, an amendment to the Investment Law came into
  effect (the Amendment) and has significantly changed the provisions of the
  Investment Law. The Amendment limits the scope of enterprises which may be
  approved by the Investment Center by setting criteria for the approval of a facility
  as a Privileged Enterprise, such as provisions generally requiring that at
  least 25% of the Privileged Enterprises income will be derived from export.
  Additionally, the Amendment enacted major changes in the manner in which tax
  benefits are awarded under the Investment Law so that companies no longer
  require Investment Center approval in order to qualify for tax benefits.
  However, the Investment Law provides that terms and benefits included in any
  certificate of approval granted prior to December 31, 2004 will remain subject
  to the provisions of the law as they were on the date of such approval.
  Therefore the EZchips existing Approved Enterprise will
  generally not be subject to the provisions of the Amendment. As a result of
  the amendment, tax-exempt income generated under the provisions of the new
  law, will subject EZchip to taxes upon distribution or liquidation
  and EZchip may be required to record deferred tax liability with respect to such
  tax-exempt income.
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         | EZchip
  applied during 2006 to the tax authorities to qualify for benefits as a
  Privileged Enterprise under the Investment Law, as amended, with 2006 as the
  election year for the program.  EZchip
  is therefore eligible for a tax exemption for a period of ten years on
  undistributed Approved Enterprise income. The duration of tax benefits is
  subject to a limitation of the earlier of 7 to 10 years from the commencement
  year, or 12 years from the first day of the year of election.  EZchip intends to reinvest the entire
  amount of its tax-exempt income and not to distribute this income as a
  dividend. As of December 31, 2007,
  EZchip did not generate income under the provision of the new law.
  Furthermore, the Company believes it is in conformity with all the
  requirements of the new law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          | e.                      | Net
  operating losses carryforward:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         | As of
  December 31, 2007, the tax losses carryforward of the Company and EZchip
  Ltd. amounted to approximately $76,307. These net operating losses may be
  carried forward indefinitely and may be offset
  against future taxable income. The Company expects that during the period in
  which these tax losses are utilized its income would be substantially
  tax-exempt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                         | The
  carryforward tax losses through December 31, 2007 of EZchips subsidiary in
  the U.S amounted to approximately $3,671. These losses may be offset against
  any future U.S. taxable income of the U.S. subsidiary for periods of up to 20
  years. In light of the U.S. subsidiarys recent history of operating losses, the Company has
  recorded a valuation allowance for all its deferred tax assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-43

---

---



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

|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--------- | ----------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 16:- | TAXES ON INCOME (CONT.)
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          | e.                      | Net
  operating losses carryforward (cont):                                                                                                                                                                                                                                                                                                                                                                                                                           
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |                         | 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. As of December 31, 2007, the Company does not expect that the
  change in ownership provisions will have an effect on its net operating
  losses.
|          |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          | f.                      | Loss before
  taxes is comprised as follows:                                                                                                                                                                                                                                                                                                                                                                                                                          

|                    |  |      |                         |      |   |         |   |   |         |  
|------------------- |  | ---- | ----------------------- | ---- | - | ------- | - | - | ------- | -
|                    |  |      | Year ended December 31, |     
|                    |  |      |                        
|                    |  | 2007 |                         | 2006 |   | 2005    |  
|                    |  |      |                         |      |   |         |  
|                    |  |      |                         |      |   |         |   |   |         |  
|Domestic
  (Israel) |  | $    | (4,225                  | )    | $ | (12,380 | ) | $ | (9,452  | )
|Foreign             |  |      | 137                     |      |   | 63      |   |   | (895    | )
|                    |  |      |                         |      |   |         |   |   |         |  
|                    |  |      |                         |      |   |         |   |   |         |  
|                    |  | $    | (4,088                  | )    | $ | (12,317 | ) | $ | (10,347 | )
|                    |  |      |                         |      |   |         |   |   |         |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | g. | 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:

|                                                 |  |      |              |      |   |         |  
|------------------------------------------------ |  | ---- | ------------ | ---- | - | ------- | -
|                                                 |  |      | December 31, |     
|                                                 |  |      |             
|                                                 |  | 2007 |              | 2006 |  
|                                                 |  |      |              |      |  
|                                                 |  |      |              |      |   |         |  
|Reserves and
  allowances                        |  | $    | 58           |      | $ | 57      |  
|Loss
  carryforward                              |  |      | 20,325       |      |   | 16,446  |  
|                                                 |  |      |              |      |   |         |  
|                                                 |  |      |              |      |   |         |  
|Deferred tax
  assets before valuation allowance |  |      | 20,383       |      |   | 16,503  |  
|Less -
  valuation allowance                     |  |      | (20,383      | )    |   | (16,503 | )
|                                                 |  |      |              |      |   |         |  
|                                                 |  |      |              |      |   |         |  
|Net deferred
  tax assets                        |  | $    |             |      | $ |        |  
|                                                 |  |      |              |      |   |         |  

| |    |                                                                                                                                                                                                                                                                                                                                                        
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The Company and its
  subsidiaries have a history of losses and
  therefore provided valuation allowances in respect of deferred tax assets
  resulting from
  operating loss carryforward and other temporary differences.                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                        
| | h. | 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 among the Company
  and its
  subsidiaries due to the uncertainty of the realization of such tax benefits
  and the effect of approved enterprise.

F-44

---

---



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

|          |                                      
|--------- | -------------------------------------
|NOTE 17:- | 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. | Total
  revenues are attributed to geographic areas based on location of the
  customers.                                                                   
| |    |                                                                                                                                                             
| |    | The
  following presents total revenues for the years ended December 31, 2007, 2006
  and 2005 and long-lived assets as of December 31, 2007, 2006 and 2005:

|                  |  |                  |        |                     |   |                  |  |                     |       |                  |   |                     |  |   |       |  |   |       | 
|----------------- |  | ---------------- | ------ | ------------------- | - | ---------------- |  | ------------------- | ----- | ---------------- | - | ------------------- |  | - | ----- |  | - | ----- | 
|                  |  | 2007             |        | 2006                |   | 2005             | 
|                  |  |                  |        |                     |   |                  | 
|                  |  | Total
  revenues |        | Long-lived
  assets |   | Total
  revenues |  | Long-lived
  Assets |       | Total
  revenues |   | Long-lived
  Assets | 
|                  |  |                  |        |                     |   |                  |  |                     |       |                  |   |                     | 
|                  |  |                  |        |                     |   |                  |  |                     |       |                  |   |                     |  |   |       |  |   |       | 
|Israel            |  | $                | 4,083  |                     | $ | 52,809           |  | $                   | 1,865 |                  | $ | 40,801              |  | $ | 2,414 |  | $ | 6,425 | 
|Far East          |  |                  | 2,862  |                     |   |                 |  |                     | 2,007 |                  |   |                    |  |   | 1,843 |  |   |      | 
|North
  America   |  |                  | 10,885 |                     |   | 2                |  |                     | 3,035 |                  |   | 5                   |  |   | 1,390 |  |   | 1     | 
|Europe &
  Others |  |                  | 1,658  |                     |   |                 |  |                     | 1,562 |                  |   |                    |  |   | 201   |  |   |      | 
|                  |  |                  |        |                     |   |                  |  |                     |       |                  |   |                     |  |   |       |  |   |       | 
|                  |  |                  |        |                     |   |                  |  |                     |       |                  |   |                     |  |   |       |  |   |       | 
|                  |  | $                | 19,488 |                     | $ | 52,811           |  | $                   | 8,469 |                  | $ | 40,806              |  | $ | 5,848 |  | $ | 6,426 | 
|                  |  |                  |        |                     |   |                  |  |                     |       |                  |   |                     |  |   |       |  |   |       | 

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

|           |  |                         |  |      |     |      |  |     | 
|---------- |  | ----------------------- |  | ---- | --- | ---- |  | --- | 
|           |  | Year ended December 31,
|           |  |                        
|           |  | 2007                    |  | 2006 |     | 2005
|           |  |                         |  |      |     |     
|           |  |                         |  |      |     |      |  |     | 
|Customer A |  | 42%                     |  |      | 19% |      |  | 1%  | 
|Customer B |  | 6%                      |  |      | 11% |      |  | 8%  | 
|Customer C |  | 5%                      |  |      | 13% |      |  | 10% | 
|Customer D |  | 1%                      |  |      | 1%  |      |  | 28% | 
|Customer E |  | 7%                      |  |      | 15% |      |  | 3%  | 

F-45

---

---



|                                               
|-----------------------------------------------
|LANOPTICS LTD. AND ITS SUBSIDIARIES            
|                                               
|NOTES TO
  CONSOLIDATED FINANCIAL STATEMENTS   
|                                               
|U.S.
  dollars in thousands (except share data)

|          |                                           
|--------- | ------------------------------------------
|NOTE 18:- | FINANCIAL AND OTHER INCOME (EXPENSES), NET

|                                                                              |  |                         |        |      |   |        |   |   |      |  
|----------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ---- | -
|                                                                              |  | Year ended December 31, |       
|                                                                              |  |                         |       
|                                                                              |  | 2007                    |        | 2006 |   | 2005   |  
|                                                                              |  |                         |        |      |   |        |  
|                                                                              |  |                         |        |      |   |        |   |   |      |  
|Income:                                                                       |  |                         |        |      |   |        |   |   |      |  
|Interest income                                                               |  | $                       | 1,143  |      | $ | 735    |   | $ | 578  |  
|Foreign currency translation
adjustments                                      |  |                         |       |      |   |       |   |   | 26   |  
|Change in fair value of warrants to
  Redeemable Preferred Shares             |  |                         |       |      |   | 9      |   |   | 9    |  
|Other income                                                                  |  |                         |       |      |   |       |   |   | 3    |  
|                                                                              |  |                         |        |      |   |        |   |   |      |  
|                                                                              |  |                         |        |      |   |        |   |   |      |  
|Total income                                                                  |  |                         | 1,143  |      |   | 744    |   |   | 616  |  
|                                                                              |  |                         |        |      |   |        |   |   |      |  
|Expenses:                                                                     |  |                         |        |      |   |        |   |   |      |  
|Interest and bank charges                                                     |  |                         | (25    | )    |   | (26    | ) |   | (37  | )
|Foreign currency translation
adjustments                                      |  |                         | (112   | )    |   | (82    | ) |   |     |  
|Amortization of discount on long-term
loan                                    |  |                         | (663   | )    |   | (80    | ) |   |     |  
|Interest on a long-term loan                                                  |  |                         | (272   | )    |   | (110   | ) |   |     |  
|Accretion to redemption value of Redeemable
  Preferred Shares in EZchip, net |  |                         |       |      |   | (2,650 | ) |   | (891 | )
|                                                                              |  |                         |        |      |   |        |   |   |      |  
|                                                                              |  |                         |        |      |   |        |   |   |      |  
|Total expenses                                                                |  |                         | (1,072 | )    |   | (2,948 | ) |   | (928 | )
|                                                                              |  |                         |        |      |   |        |   |   |      |  
|                                                                              |  |                         |        |      |   |        |   |   |      |  
|Financial and other income (expenses), net                                    |  | $                       | 71     |      | $ | (2,204 | ) | $ | (312 | )
|                                                                              |  |                         |        |      |   |        |   |   |      |  

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 19:- | SUBSEQUENT EVENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | Following
  the election of the last two major shareholders to exchange their Preferred
  Shares of EZchip for the Companys Ordinary Shares pursuant to the Exchange
  Right Agreement (see Notes 3f and 3h), on January 22, 2008, the Company
  acquired 4,588,655 Preferred B Shares and 12,555,993 Redeemable Preferred C
  Shares of EZchip, in consideration of the issuance of 5,011,841 Ordinary
  Shares of the Company. The total fair value of the Company Ordinary Shares
  issued for the acquisition was $82,645, based on the average share prices of
  the Company Ordinary Shares two days before and two days after the
  announcement.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | Following
  the acquisition, the Company owns all of the outstanding Preferred Shares of
  EZchip and approximately 99% of the outstanding Ordinary Shares of EZchip.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | The transaction will be accounted for
  according to the purchase method of accounting.  The Company is in the process of
  obtaining an independent valuation of the tangible and intangible assets
  acquired in the above transaction. The excess of the purchase price over
  EZchips tangible assets acquired will be recorded as intangible assets (such
  as In-process Research and Development, Developed Technology, Customer Base
  and Goodwill).                                                                                                                                                                                         

F-46

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

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 19:- | SUBSEQUENT EVENT (CONT.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          | If according
  to the purchase price allocation in-process research and development expenses
  will be indicated, it will be recorded as an expense in a separate line item
  In-process research and development charge in the Companys statement of
  operations during the first quarter of 2008, the fiscal quarter in which the
  acquisition was consummated.  The
  amount allocated to tangible and intangible assets will be amortized
  using the straight-line method over its useful life,  the amount allocated to goodwill will not
  be amortized, but will be tested for impairment annually or
  more frequently if impairment indicators will be present.

F-47

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# 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/ Eli Fruchter
Eli FruchterPrincipal Executive Officer
| |  | ----------------------------------------------------------------------------------------

Dated: March 27, 2008

68

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