UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 20-F

             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 2002

                        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:
                                     None

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


                    Ordinary Shares nominal value NIS 0.02
                    --------------------------------------
                               (Title of Class)


Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:

                                     None


         Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by
the annual report. 8,468,035 Ordinary Shares

         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.

                            |X|  Yes        |_|  No

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

                            |_| Item 17     |X|  Item 18

Forward-Looking Statements

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

Introductory Note

         LanOptics was incorporated as a limited liability company under the
laws of the State of Israel in 1989. Until 1999, our principal business was
the development, manufacturing and marketing of solutions and Internet
applications that improve connectivity and performance of corporate Local Area
Networks ("LANs") and Wide Area Networks ("WANs"). Our business now consists
of the development and marketing of high performance network processors
through our independent business unit, E.Z. Chip Technologies Ltd. ("EZchip"),
an Israeli company in which we currently have a 51% ownership interest. As
used in this Annual Report, the term "Company" means LanOptics and its EZchip
subsidiary taken together, unless otherwise expressly stated.



PART I

Item 1.      Identity of Directors, Senior Management and Advisors

             Not applicable.

Item 2.      Offer Statistics and Expected Timetable

             Not applicable.

Item 3.      Key Information

Selected Consolidated Financial Data:

         The following selected consolidated financial data of the Company as
of December 31, 2001 and 2002 and for the three years ended December 31, 2002,
are derived from the Company's audited consolidated financial statements which
are included in this annual report and have been prepared in accordance with
Israeli GAAP. The selected consolidated financial data as of December 31,
1998, 1999 and 2000 and for the years ended December 31, 1998 and 1999 have
been derived from audited consolidated financial statements not included in
this annual report and have also been prepared in accordance with Israeli
GAAP. The Selected Financial Data set forth below should be read in
conjunction with and are qualified by reference to Item 5. Operating and
Financial Review and Prospects, and the Consolidated Financial Statements
included elsewhere in this Annual Report.

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


<TABLE>
<CAPTION>

                                                      1998         1999         2000          2001         2002
                                                      ----         ----         ----          ----         ----
                                                          (in thousands, except share and per share data)
                                                          -----------------------------------------------

Statement of Operations Data:

<S>                                                       <C>          <C>           <C>          <C>        <C>
Net sales                                                 $0           $0            $0           $0         $465
Operating loss                                          (441)      (1,164)       (6,019)      (9,766)     (15,875)
Profit (loss) from continuing operations                  88         (555)       (1,831)        (443)      (6,728)
Net profit (loss)                                    (13,652)      (7,484)       (6,600)         350       (6,677)

Per Share Data:

Loss from operations                                   (0.08)       (0.18)        (0.88)       (1.33)       (2.04)
Net profit (loss) from continuing operations           0.016        (0.09)        (0.27)       (0.06)       (0.87)
Basic and diluted net profit (loss)                    (2.35)       (1.16)        (0.97)        0.05        (0.86)
Weighted average number of shares outstanding      5,803,623    6,423,932     6,804,043    7,350,027    7,782,593

Balance Sheet Data:

Total assets                                         $22,646      $16,095       $34,568     $ 24,220     $ 17,580
Net assets                                           $16,126      $11,123       $27,558      $20,818      $13,368
Share capital                                        $21,671      $24,176       $24,833      $24,848      $33,803
Dividends declared per share                            --           --           --            --
</TABLE>
<PAGE>

Risk Factors:

Risks Relating to Our Business

EZchip has a limited operating history, and its future financial results are
difficult to predict.

         Our success depends on EZchip's future success and we are, therefore,
subject to the risks encountered by EZchip and the network processor industry.
EZchip was formed in 1999 and has a limited operating history. EZchip's
limited operating history makes it difficult to evaluate the prospects of its
business. Moreover, the industry in which EZchip operates is constantly
evolving and is subject to technological and competitive forces beyond its
control. EZchip's ability to design and market products to meet customer
demand and the revenue and income potential of its products and business are
unproven. As an early stage company in the rapidly developing network
processor industry, EZchip faces numerous risks and uncertainties. Some of
these risks relate to its ability to:

         -        expand and enhance its product offerings;

         -        diversify its sources of revenue;

         -        maintain adequate control of its expenses;

         -        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.

         The growth of our business depends in part on increased acceptance
and use of networking equipment. In particular, we depend on the ability of
our target customers to develop new products and enhance existing products for
the networking equipment market that incorporate our products and to introduce
and promote their products successfully. The market for networking equipment
depends in part upon the deployment of 10 Gigabit Ethernet technologies that
enable the forwarding of data at a high speed. Ultimately, users may not
choose the 10 Gigabit Ethernet technologies. If the use of networking
equipment does not grow as we anticipate, or our target customers do not
incorporate our products into theirs, our growth would be impeded.

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
revenue.

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

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

Our products may have defects, which could damage our reputation, decrease
market acceptance of our products, cause us to lose customers and revenue,
increase production costs and result in liability.

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

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 any revenue from our products after incurring
significant design and development expenditures. A customer may decide to
cancel or change its product plans, which could cause us to generate no
revenue from a product 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 their equipment for a period of up to a year, if at
all. Due to this lengthy design and development cycle, we may experience
delays 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 or that such efforts by our
customers will be successful.

The loss of personnel could affect our ability to design and market our
products.

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

If we are not able 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 respective intellectual property rights. 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 pending patent applications. We might not succeed in
attaining patents from any of our pending applications. Even if we are awarded
patents, they 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 technology 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 respective 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 if we are forced to replace our manufacturer.

         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 a substantial majority of 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. Introducing new products or transferring existing products
to a new third party manufacturer would require significant development time
to adapt our designs to their manufacturing processes and could cause product
shipment delays. In addition, the costs associated with manufacturing our
products may increase if we are required to use a new third party
manufacturer. If we fail to satisfy our manufacturing requirements, our
business would be materially harmed.

         Under a November 2000 agreement, IBM agreed to manufacture our
NP-1/NP-1c network processor and related prototypes until December 31, 2005.
Under the agreement's terms, IBM may reduce or delay shipment if its ability
to manufacture our NP-1 network processors is constrained. IBM is the sole
manufacturer of the NP-1 and NP-1c. If IBM fails to deliver network processors
on time or at all, our business could be severely harmed. If the arrangement
with IBM is terminated or amended in a manner detrimental to us, it could
adversely affect our business while we try to locate a substitute supplier.
There is no assurance that we would be able to locate a substitute supplier on
commercially reasonable terms or at all.

         Under a separate agreement, a third party manufacturer is
manufacturing our QX-1 traffic manager. This third party is the sole
manufacturer of the QX-1.

If EZchip is unable to procure funding on favorable terms, it would not be
able to grow its business which could negatively affect our revenues.

         EZchip is a developing company and we expect that significant funding
will be required in order to continue to develop its products and to expand
its business. Given the state of development of EZchip's products and the
present economic environment, we believe that we have sufficient funding
resources to finance our operations through the next 18 months. The capital
markets have experienced severe downturns over the last couple of years,
especially relating to technology companies, and access to capital has been
both difficult and expensive. Unless there is an improvement in this
situation, when we do require additional funding we may encounter difficulty
in raising such funding through the capital markets or otherwise. 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.

If LanOptics is unable to procure funding on favorable terms, it may not be
able to maintain its ownership percentage in EZchip.

         LanOptics presently owns approximately 51% of EZchip. In any future
EZchip financing rounds, LanOptics would lose control of EZchip unless it
invests additional funds to preserve its equity position. We may not have the
cash available to make an investment in order to retain control of EZchip.
Furthermore, even if we have funds available to invest in EZchip, it is
possible that additional funding from other investors would still dilute our
ownership interest in EZchip or cause us to lose control of EZchip.

Terrorist attacks, such as the attacks that occurred in New York and
Washington, DC on September 11, 2001, and other acts of violence or war may
materially adversely affect the markets on which our securities trade, the
markets in which we operate, our operations and our profitability.

         Terrorist attacks may negatively affect our operations. These attacks
or armed conflicts may directly impact our physical facilities or those of our
suppliers or customers. Furthermore, these attacks may make travel and the
transportation of our products more difficult and more expensive and
ultimately affect our sales. Political and economic instability in some
regions of the world may also result and could negatively impact our business.
The consequences of any of these armed conflicts are unpredictable, and we may
not be able to foresee events that could have an adverse effect on our
business or your investment.

         More generally, any of these events could cause consumer confidence
and spending to decrease or result in increased volatility in the United
States and worldwide financial markets and economy. They also could result in
or exacerbate economic recession in the United States or abroad. Any of these
occurrences could have a significant impact on our operating results, revenues
and costs and may result in the volatility of the market price for our
securities and on the future price of our securities.

Risks Relating to Our Location in Israel

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

         We were organized under the laws of the State of Israel and a
substantial portion of our assets, and our principal operations, are located
in Israel. Consequently, our operations, financial condition and results of
operations are directly influenced by economic, political and military
conditions in and affecting Israel. Our operations could be adversely affected
if major hostilities break out in the Middle East or if trade between Israel
and its present trading partners is curtailed. Since the establishment of the
State of Israel in 1948, a state of hostility has existed between Israel and
the Arab countries in the region. Peace talks between Israel and the
Palestinian Authority began in the early 1990s, but they broke down in
mid-2000. Attacks on Israel by Palestinian terrorists, and military responses
by Israel, have accelerated considerably since late 2000. An effort to resume
peace talks between Israel and the Palestinian Authority was initiated in the
second quarter of 2003. We cannot predict whether or when a peace process will
resume, whether a full resolution of these problems will be achieved, the
nature of any such resolution or any consequences that any of these factors
may have on us. Any future armed conflicts or political instability in the
region could negatively affect our business or harm our results of operations.
Israeli companies and companies doing business with them have been subject to
an economic boycott initiated by the Arab countries. This boycott and policies
may seriously harm our operating results or the expansion of our business.
Additionally, some of our key employees in Israel are obligated to perform up
to 36 days of military reserve duty annually, and more in the case of a
national emergency. Our operations could be disrupted by the absence for a
significant period of one or more of our key employees due to military
service. Any disruption in our operations would harm our business.

Changes to tax laws may result in our receiving fewer benefits than we hope to
receive.

         In the past, we received tax benefits under Israeli law for capital
investments in facilities and equipment that are designated as "Approved
Enterprises." We expect to receive these benefits in the future when EZchip
attains volume sales levels. To maintain our eligibility for these tax
benefits, we must continue to meet several conditions including making
required investments in fixed assets. If we fail to comply with these
conditions in the future, the tax benefits received could be cancelled. From
time to time, we may submit requests for expansion of our Approved Enterprise
programs or for new programs. These requests might not be approved. The law
and regulations prescribing the benefits provide for an expiration date for
the grant of new benefits. The expiration date has been extended several times
in the past. The expiration date currently in effect is December 31, 2003, and
no new benefits will be granted after that date unless the expiration date is
again extended. There is a committee that is reviewing the benefits program
under the law. The termination or reduction of certain programs and tax
benefits (particularly benefits available to the Company as a result of the
Approved Enterprise status of the Company's facilities and programs) or a
requirement to refund a portion of the tax benefits already received , would
have a material adverse effect on the Company's business, operating results
and financial condition

It may be difficult to enforce a U.S. judgment against us or our officers and
directors or 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.

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.

Item 4.      Information on the Company

History and development of the Company:

         LanOptics Ltd. was incorporated as a limited liability company under
the laws of the State of Israel in 1989. Until 1999, our principal business
was the development, manufacturing and marketing of solutions and Internet
applications that improve connectivity and performance of corporate LANs and
WANs. Our business now consists of the development and marketing of high
performance network processors through our independent business unit, E.Z.
Chip Technologies Ltd., or EZchip, in which we currently have a 51% ownership
interest. Our principal executive offices are located at 1 Hatamar street,
P.O. box 527, Yokneam 20692 Israel, and our telephone number is
+972-4-959-6666. Puglisi & Associates, located at 859 Library Avenue, Suite
204, P.O. Box 885, Newark, Delaware 19715, serves as our agent for service of
process.

         Our business initially consisted of local area networking equipment,
such as hubs and switches, based on the Token Ring protocol. Beginning in
1995, the Ethernet protocol became increasingly dominant in the LAN market.
Products based on the Token Ring protocol, which formed the core of our
business, suffered from declining market share.

         In response to the changing market environment, we started to develop
Ethernet protocol-based LAN products. In addition, we started new business
initiatives in areas different from our core business. One of these
businesses, which in 1996 was incorporated as LanOptics' NetXchange
subsidiary, operated in the fax over Internet Protocol market. We decided to
cease the operations of NetXchange in 1998, after sustaining significant
losses. The other business, which in 1997 was incorporated as our NetGuard
subsidiary, dealt with Internet security solutions.

         In mid-1999 we decided to cease the research and development of new
switching products for LANs and instead focus on our internal ASIC design team
(which developed ASICs for our products). This team began work on the
development of network processors. This new business initiative was
incorporated as our EZchip subsidiary in December 1999.

         During the first quarter of 2001, we closed the operations of
NetGuard Ltd., our subsidiary which provided security solutions for the
Internet.

         Even though we continued to manufacture and sell legacy network
products during 2002, to support our customers, our sales levels for these
legacy products have become immaterial. As a result, the related assets,
liabilities and results of operations for 2001 and 2002 have been reclassified
as "discontinued operations". The reclassification does not result in any
changes to net assets or net income (loss) for the reported periods.

         Through EZchip, we are developing high-performance network processors
for high speed networking equipment. EZchip's technology enables seven-layer
packet processing without any noticeable degradation in speed. EZchip's
solutions enable networking vendors to build powerful products quickly and
cost effectively. EZchip's initial product is the NP-1, a 10-Gigabit,
seven-layer network processor. In April 2002, EZchip announced the
availability of the NP-1 which it has begun shipping to customers. In January
2003, EZchip announced commercial availability of its 10-Gigabit traffic
manager, the QX-1. EZchip second-generation network processor, the NP-1c that
was announced in October 2002, is now in testing at the company's laboratories
and is expected to be commercially available by the end of 2003. The NP-1c is
an enhanced 10-Gigabit, seven-layer network processor.



Business Overview:

The Network Processor Industry

     Background

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

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

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

     Market Trends

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

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

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

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

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

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

Our Solution

         We design and produce task-optimized network processors for
high-speed networking equipment. We are a fabless semiconductor company, which
means that we do not have our own semiconductor manufacturing plant but rather
we utilize outside fabrication facilities. Our first product, which was
introduced in April 2002, is the NP-1, a merchant silicon network processor
that forms the core of a seven-layer, 10-Gigabit networking equipment. We are
in the final stages of developing an improved and less expensive version of
the NP-1, the NP-1c, which uses a 0.11-micron chip manufacturing process. The
NP-1c's design will be compatible with the NP-1, so that our customers can
begin design and testing with the NP-1 and then migrate to the NP-1c for
volume production. In January 2003, we introduced a 10-Gigabit traffic
manager, the QX-1, which complements the NP-1 network processor for added
traffic management functionality and expanding its quality of service
features. We also initiated development of an additional network processor,
based on the same core technology, which will integrate the functionality of
several co-processors. The architecture and features of these products offer
the flexibility, scalability and price performance that are sought by
communications equipment vendors. Networking equipment vendors use EZchip's
network processors to form the silicon core of next-generation switches and
routers for voice, video and data integration in a variety of applications.
Due to the present downturn in the communications market, we have currently
delayed plans for the development of a network processor operating at speeds
of up to 40 Gigabits per second.



     Products

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

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

         The QX-1, a 10-Gigabit traffic manager was introduced in January
2003. The QX-1 is an optional chip that complements the NP-1 by expanding its
quality of service features. The combination of QX-1 with NP-1 enables the
design of systems that meet the stringent requirements for advanced services
provisioning. The QX-1 is employed in systems that require packet queuing and
shaping, congestion management and hierarchical scheduling.

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

         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. We released the first
tool kit, EZdesign, in January 2001. It is a comprehensive software
development toolset for writing, testing and debugging programs for NP-1 to
implement a wide range of applications and reduce time to market of
next-generation networking products. It includes a hardware-software
simulator, a library of pre-coded subroutines, a high-level language compiler,
an evaluation board and a functional tester. We continuously release
subsequent versions of the EZdesign toolset, providing functional
enhancements.

         EZdriver is a toolset that facilitates the development of the control
path software for NP-1 and NP-1c based systems. It enables applications that
run on the control CPU to communicate with the NP-1 processor. EZdriver
consists of routines that execute on the control CPU and provide an API for
interfacing the NP-1. It includes NP-1 chip configuration, microcode loading,
creation and maintenance of NP-1 lookup structures, sending and receiving
frames to and from the NP-1, as well as configuration and access to the NP-1
statistics block. EZdriver along with EZdesign provide extensive debugging
capabilities, and enable software-driven debugging features (e.g. breakpoints,
single step, register and memory access) to be performed on both the NP-1
simulator and the actual chip.

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


Future Products

         We are developing the NP-2, a 10-Gigabit, seven-layer network
processor based on the uniquely scalable architecture of the NP-1. The NP-2
will integrate many of the functions currently performed by complementary
chips, named co-processors, into the network processor making it a single-chip
solution.

Technology

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

         Earlier generations of network processors required multiple
integrated circuit chips and related hardware and software to perform the
requisite designed-in functions, placing limitations both on the amount of
data that could be handled simultaneously and the speed at which it could be
processed. Moreover, these earlier solutions employed generic RISC processors
rather than specially designed processors. EZchip's advance over these earlier
designs lies in its integration of processing and classification functions.
This is accomplished though EZchip's Task Optimized Processing technology
(TOPcore(R)). TOPcore technology, which includes patented elements and other
proprietary information, uses a combination of chip architecture and
innovative search algorithms, together with low-cost, power-efficient DRAM
memories, to incorporate these functions on a single chip. As a result,
systems designed using EZchip's NP-1 product offer equipment vendors the
ability to reduce chip count, power consumption and cost.

         In most applications, a significant portion of the resources of a
network processor are devoted to searching through large routing and policy
tables resident in the memory. The process of accessing and searching memory
for the appropriate instructions can be a significant hindrance to
performance. The NP-1 addresses these shortcomings through the use of both
state-of-the-art embedded memory technology and high-performance,
high-capacity external memory. The embedded memory requirements are provided
through IBM's embedded DRAM technology, which is obtained under a technology
agreement with IBM. In addition, IBM has advised us that it intends to develop
high-performance embedded DRAM cores for the communications market that meet
the requirements of EZchip.

         EZchip's TOPcore technology is presently featured on its NP-1
product, which is capable of serving a 10-Gigabit, seven-layer network. The
TOPcore technology can be scaled for larger bandwidth applications, such as
40-Gigabit/OC-768, and greater. The nature of the TOPcore technology permits
the network processor to be scaled to a very high throughput rate simply by
integrating more task optimized processors within the network processor. This
simplifies customer designs and provides a smooth migration path from
10-Gigabit to 40-Gigabit systems. In addition, since the software developed to
implement specific applications is transparent to the number of integrated
task optimized processors, the software can be reused in the future when
designing networking equipment using higher throughput rates.

Research and Product Development

         Currently, 70 employees, representing about 76% of EZchip's
employees, are engaged in research and development. EZchip's senior executives
devote a substantial portion of their time to frequently communicating with
its customers to determine product needs that should be addressed. The Office
of the Chief Scientist (OCS) of Israel does not provide any funding for
EZchip's research and development costs, and consequently we do not have any
obligation to the OCS.

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

<TABLE>
<CAPTION>

                                                                                 Year Ended December 31,
                                                                                -------------------------
                                                                                  2001            2002
                                                                                  ----            ----

<S>                                                                              <C>             <C>
Research and development costs, excluding amortization                           $6,892          $7,605
Amortization of prepaid development and production costs *                        $542            $548
Research and development, including amortization                                 $7,434          $8,153
---------------------------------------------------------------------
</TABLE>

        * During 2000, we recorded prepaid development and production costs in
        the amount of $2,134,000 under an agreement signed between EZchip and
        IBM (See Note 5 to the financial statements). According to the
        agreement, EZchip issued to IBM fully vested Ordinary Shares, in
        consideration for the development by IBM of unique semiconductor
        communications cores and technologies and production of specialized
        high-performance embedded DRAM cores, which meet the rigorous
        requirements of EZchip's 10-Gigabit wire-speed processing. Development
        costs are amortized according to specific milestones determined in the
        agreement and production costs are amortized based on quantities
        produced.

Sales and Marketing

         We announced the immediate availability of our NP-1 network processor
in April 2002. To date, we have had no significant revenues from product
sales. The revenues we have recognized are attributed to the sale of sample
chips, evaluation systems and development software tools, that our customers
are using to develop their NP-1 based products. We work closely with existing
and potential customers in their design of systems and equipment where the
capabilities of EZchip's products can be exploited. We are targeting
designers, manufacturers and vendors of networking equipment and other
large-scale data processing network devices, such as wireless communications
base stations.

         To facilitate marketing efforts, EZchip has built on its extensive
industry exposure through trade shows and similar events and has established
sales offices in California and Massachusetts. In Israel and North America, we
have our own direct sales force. Currently, our marketing staff includes 11
marketing professionals and administrative personnel. The direct sales force
consists of persons with technical training and significant background in the
semiconductor industry. Sales efforts are augmented by the direct involvement
of EZchip's senior executives, who work closely with customers to determine
product needs. In the rest of the world, our strategy is to work with local
marketing channels, including sales agents, resellers and distributors. These
channels are assigned territories of primary responsibility, but we do not
grant exclusive rights to any territory. We will consider the need for local
sales offices when justified by the circumstances. The in-house sales force
and the external marketing channels are also responsible for providing local
technical support. Our marketing activities include:

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

         o  public relations activities and customer events;

         o  advertising, technical articles in industry publications
            and marketing collateral materials; and

         o  communication on the Internet.


         During 2002 and early 2003, the NP-1 network processor gained
industry recognition, including being voted finalist of the 2002 World
Technology Award for Communications Technology, being awarded the 2002 Comet
Award from Communication Systems Design Magazine, being chosen as both Best
Overall Product and Best Network Processor at the 2002 Network Processor
Conference West and being awarded the Microprocessor Report Analysts' Choice
Award for Best Network Processor.

         We also work together with leading vendors of complementary
technologies to provide our customers with fully interoperable solutions. At
present we have announced interoperability with switching fabrics from IBM
Corporation, ZettaComm Inc, TeraChip Inc, and Broadcom Corporation as well as
other peripheral devices from Broadcom Inc and PMC-Sierra Inc.




Customer Support

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

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

Competition

         The semiconductor market, particularly the high-performance
semiconductor market, is highly competitive and subject to rapid technological
change, price erosion and heightened international competition. Especially in
an area such as network processors, where technology has not been standardized
and where applications are in early stages of development, competitive
pressures can be fierce. Many of our competitors are larger, have greater
financial resources, and are better known.

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

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

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

Intellectual Property Rights

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

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

         The Company holds one United States patent, No. 6,532,457. The
Company also has two patent applications (Serial Nos. 09/593,397 and
09/753,690) for which respective Notices of Allowances (NOA) have been
received, such that these applications are expected to mature into issued
United States patents in the coming months. In addition, the Company holds a
pending patent application in the United States (Serial No. 09/609,221), for
which we have yet to receive an Official Action from the USPTO. There can be
no assurance that the Company's pending application will ultimately be issued
either at all or within the scope of the claims sought by the Company.
Furthermore, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology, or
design around any patents issued to the Company. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may copy aspects of
the Company's products or obtain and use information that the Company regards
as proprietary. Policing any of such unauthorized uses of the Company's
products is difficult, and although the Company is unable to determine the
extent to which piracy of its software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States or Israel. There can be no assurance that the
Company's efforts to protect its proprietary rights will be adequate or that
the Company's 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. In November 2000, we entered into an
agreement with IBM to manufacture our NP-1 and NP-1c network processor. A
third party manufacturer has also been secured for the QX-1 Traffic Manager.
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.

         Prototypes of the NP-1 are being manufactured using IBM's SA-27E
0.18-micron ASIC technology, while NP-1c volume production will utilize IBM's
0.11-micron Cu-11 ASIC template. Use of this new manufacturing technology is
expected to enable enhanced performance while reducing manufacturing costs
significantly.

         IBM is the sole manufacturer of the NP-1 and NP-1c, and any late
delivery or failure to deliver products could result in delays in satisfying
customer demand, increased costs and loss of revenues.

Legacy Operations

         Our original business (or "LanOptics Legacy operations") concentrated
on the development, manufacturing and marketing of solutions and Internet
applications to improve the connectivity and performance of corporate LANs.
Beginning in 1999, we carried out plans to focus exclusively on the high speed
network processor market, through our subsidiary, EZchip, resulting in the
cessation of the operations of our Internet applications business segment
principally consisted of NetGuard and, prior to that also included NetXchange.
Even though we continued to manufacture and sell LanOptics legacy network
products during 2002 to support our customers, our sales levels for these
legacy products have become immaterial. As a result of the closure of
NetGuard's operations in 2001, and the immateriality of LanOptics legacy
operations during 2002, the NetGuard and LanOptics Legacy operations related
assets, liabilities and results of operations for 2001 and 2002 have been
reclassified on our financial statements as "discontinued operations".

          We may continue to generate small amounts of revenue from sales and
royalties related to LanOptics and NetGuard legacy products. However, since
LanOptics and NetGuard legacy products are no longer being manufactured, all
of these sales will be from existing inventory.



         Property, Plant and Equipment

         Our principal capital expenditures to date have been the purchase of
equipment and other fixed assets used in our business (mainly in Israel).
These purchases totaled $698,000 in 2000, $1,105,000 in 2001 and $435,000 in
2002. Our capital expenditures in 2000, 2001 and 2002 were spent primarily for
the procurement of EZchip research and development hardware equipment and
software tools.

         The Company does not own any real property. The Company's principal
product assembly, quality control, development, marketing and administrative
facilities occupy approximately 25,000 square feet of a building in Yokneam,
Israel which is leased through January 2007.

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

Item 5.                    Operating and Financial Review and Prospects.

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

General

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

         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. The majority of sales are made outside of Israel in U.S. dollars
and the majority of purchases of materials and components are invoiced and
paid in U.S. dollars. In addition, a majority of other expenses, principally
marketing expenses, are incurred outside Israel in U.S. dollars or paid in
U.S. dollars. See Note 2b to our Consolidated Financial Statements.

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 its consolidated financial statements:

Prepaid development and production costs

         Prepaid development and production costs resulted from an agreement
signed between EZchip and IBM. According to the agreement, EZchip issued to
IBM fully vested Ordinary Shares, in consideration for the development by IBM
of unique semiconductor communications cores and technologies and production
of specialized high-performance embedded DRAM cores, which meet the rigorous
requirements of EZchip's 10-Gigabit wire-speed processing.

         Development costs are amortized according to specific milestones
determined in the agreement, which we believe appropriately reflects the
economic usage of the capitalized asset. Production costs will be included in
cost of sales based on quantities produced.

Other Assets

              On August 19, 2002, the Company acquired 2,777,778 Preferred A
shares and 737,462 Preferred B shares of EZchip, in consideration of the
issuance of 1,153,508 Ordinary shares of the Company. The total fair value of
the Ordinary shares issued for the acquisition is $8,956 (determined, based on
the average price of LanOptics' Ordinary shares two day before and after the
announcement date of the transaction). The transaction was accounted for
according to the purchase method of accounting, and accordingly, the purchase
price has been allocated to the assets acquired and liabilities assumed based
upon their estimated fair values at the date of acquisition.

              The preliminary purchase price allocation (in thousands of
dollars) is as follows:

              EZchip Preferred A and B shares acquired          $        1,440
              Intangible assets acquired:
                 In-process research and development             4,655
                 Technology (1)                                   1,425
                 Goodwill (2)                                    1,634
              Liabilities assumed                                (198)
                                                               ---------------

              Total consideration                                $    8,956
                                                               ===============

(1) The technology is amortized using a straight-line method over the useful
life of the technology, which is 5 years.
(2) The goodwill is amortized over a period of 10 years, using the
straight-line method.


Results of Operations

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

<TABLE>
<CAPTION>

                                                             2000           2001           2002
                                                       -----------    -----------    -----------

<S>                                                       <C>            <C>           <C>
Revenues                                                       --             --          $ 465
Costs of Revenues                                              --             --            271
                                                       -----------    -----------    -----------
Gross Profit                                                   --             --            194

Operating expenses:
Research & Development Cost, Net                            4,530          7,434         12,808
Selling General and Administrative net                      1,489          2,332          3,261
                                                       -----------    -----------    -----------
Total operating expenses                                    6,019          9,766         16,069

Operating Loss                                            (6,019)        (9,766)       (15,875)

Financial Income, net                                         726          1,427            658
Other Income                                                  465            814             --
                                                       -----------    -----------    -----------
Loss before minority share                                (4,828)        (7,525)       (15,216)

Minority interest in Loss from Subsidiaries                 2,997          7,082          8,488

                                                       -----------    -----------    -----------
Net Loss from continuing Operations                       (1,831)          (443)        (6,728)

Income/(Loss) from Discontinued Operation                 (4,769)            793             51

                                                       -----------    -----------    -----------
Net Profit (Loss)                                         (6,600)            350        (6,677)
                                                       ===========    ===========    ===========
</TABLE>




                  Revenues. 2002 is the first year we have generated revenues
from network processors, through our subsidiary, EZchip, which is now our only
continuing operation. All the revenues we have generated in the past years are
now classified as discontinued operations. Therefore, there are no revenues
presented in 2001 and 2000. The Company's revenues, totaling $465,000 in 2002,
were derived solely from the sale of EZchip's products, which in 2002,
included mainly the sale of sample network processors chips, evaluation
systems and software tools.

                  Cost of revenues. Cost of revenues totaled $271,000 (58% of
sales) in 2002 and was composed of $107,000 (23% of revenues) amortization of
developed technology and $164,000 (35% of revenues) related to the production
and manufacturing costs of our products.


                  Research and Development Cost, Net. Research and Development
Cost, Net consists mainly of the salary and benefits of engineers. Reported
figures in 2000, 2001 and 2002 consist entirely of EZchip research and
development costs. Net research and development expenses were $4.53 million,
$7.4 million and $12.8 million in 2000, 2001 and 2002, respectively. The
increase in 2001 was due to the increased investment in research and
development by EZchip, and consists primarily of additional research and
development personnel. The increase in 2002 is mainly attributable to a
one-time write-off of in process R&D expenses in the amount of $4.66 million
during 2002.

                  Selling, General and Administrative Expenses. Selling,
General and Administrative Expenses consist primarily of salaries, advertising
expenses, participation in trade shows and collateral materials, as well as
outside professional accounting and legal fees and other related expenses.
These expenses were $ 1.49 million, $2.33 million and $3.26 million in 2000,
2001 and 2002, respectively. The increase in 2001 and 2002 was mainly due to
the increased investment in sales and marketing by EZchip.

                  Financial Income, Net. Financial Income, Net consists
primarily of interest earned on cash and cash equivalents, short-term deposits
and marketable securities, in addition to gains/losses arising from marketable
securities and foreign currency translation adjustments. Financial Income, Net
was $ 0.73 million, $1.43 million and $0.66 million in 2000, 2001 and 2002,
respectively. The increase in 2001 is mainly attributable to the interest
received on the funds raised by EZchip in November 2000. The decrease in 2002
is attributable to the drop in interest bearing cash, cash equivalents,
short-term deposits and marketable securities levels, resulting from
operational losses.

                  Minority Interest in Loss. Minority Interest in Loss
primarily reflects the share of the minority shareholders in EZchip's losses,
allocated among the various classes and series of EZchip shares, according to
their respective ownership level, as determined by liquidation preference.
Minority Interest in Loss was $2.99 million, 7.08 million and $8.49 million in
2000, 2001 and 2002, respectively. The increase in Minority Interest in Loss
is a result of increased losses in EZchip, in addition to a higher
participation rate in losses of the minority in 2002 and 2001 compared to
2000.

                  Income (Loss) from Discontinued Operations. Income (Loss)
from Discontinued Operations reflects the income (loss) resulting from
NetGuard and LanOptics legacy operations. Income (Loss) from Discontinued
Operations was $(4.8) million, 0.8 million and $0.05 million in 2000, 2001 and
2002, respectively.



Differences Between US and Israeli GAAP

         The consolidated financial statements of LanOptics conform with
accounting principles generally accepted in Israel (Israeli GAAP), which
differ in certain material respects from those followed in the United States
(US GAAP). The main differences relate to the accounting for Preferred Shares
of a subsidiary and gains from the issuance of a subsidiary's Ordinary Shares
to a third party. As a result, losses for the year ended December 31, 2002,
and deficiency in shareholders' equity as of that date in accordance with US
GAAP were $15,126,000 and $7,561,000, respectively, as compared with net loss
and shareholders' equity in accordance with Israeli GAAP, of $6,677,000 and
$7,801,000, respectively. See Note 16 of Notes to the Consolidated Financial
Statements.

Liquidity and Capital Resources

         The Company has satisfied its financial requirements primarily
through equity investments, funds provided by operations and, more
historically, through research and development grants. As stated above under
"Item 4. Information on the Company-Research and Product Development,"
EZchip's research and development has not been funded by Israel's Office of
Chief Scientist, but rather has been funded through the proceeds of third
party investments, combined with contributions by LanOptics. The third party
financing for EZchip was received in 2000, when we conducted two rounds of
financing for EZchip, raising $25.2 million through the private placement of
EZchip's Preferred Shares. The amount of investments by third parties was
recorded as Preferred Shares of a subsidiary in the financial statements. In
addition, LanOptics made a $2 million investment in EZchip during 2000. No new
external financing was received during 2001 and 2002, and our operating
activity was funded mainly by cash reserves. In early 2003 EZchip Technologies
has concluded its Series C equity financing, totaling $13.5 million, of which,
LanOptics invested $2.3. In addition, EZchip signed an agreement for a $3
million credit line facility, of which $1.5 million was immediately withdrawn.
The equity funding consists, in addition to the initial investment of $13.5
million, an option to invest up to another $8 million in the future.

         We believe that our unused cash and short-term deposit balances will
provide sufficient cash resources to finance our operations at least through
the end of the first quarter of 2005. However, if we grow more rapidly than
currently anticipated or if we do not generate sufficient revenues, it is
possible that we would require additional funds before the end of such period.

Impact of Exchange Rate Fluctuations on Monetary Assets and Liabilities

         The relationship between our monetary assets and liabilities in a
particular currency affects our financial results. For example, if we have
monetary assets denominated in a particular foreign currency (such as accounts
receivable denominated in ECUs) and do not use financial instruments to guard
against currency fluctuations, then we would report financial expense to the
extent that the currency is devalued against the U.S. dollar. The caption
"Financial income (expenses), net" in our Financial Statements includes the
impact of these factors as well as traditional interest income or expense. See
Note 13a to the Company's Financial Statements.

Corporate Tax Rate

         Because we have elected to participate in the alternative benefits
program for our current Approved Enterprise, the income derived from that
enterprise will be exempt from Israeli taxes on corporate income during
certain benefit periods, except to the extent that dividends are distributed.
The period of tax benefit for EZchip's Approved Enterprise expires in 2013.
Certain investment income derived by EZchip from investments may not be
regarded by the Israeli tax authorities as income from its Approved Enterprise
and consequently may be taxed at full rates in Israel.

Item 6.      Directors, Senior Management and Employees.

         Set forth below are the names of all directors and executive officers
of the Company and all persons chosen to become directors or executive
officers, all positions and offices with the Company held by each such person,
his term of office as director and/or as executive officer and the period
during which he has served as such.

Directors

         The following individuals served on our Board of Directors throughout
the year ended December 31, 2002, and are currently the members of our Board
of Directors:

         Dr. Meir D. Burstin is Chairman of the Board of Directors of the
Company as well as the Chairman of the Board of Directors of its subsidiary
EZchip. Dr. Burstin was the Chairman and founder of ART, Advanced Recognition
Technologies Inc., a leader of embedded speech and handwriting recognition.
Dr. Burstin was a founder and chairman of the Board of Ornet, a data switching
company founded in 1996 and acquired by Siemens two years later. Dr. Burstin
was a director of several other high-tech start up companies and the Chairman
of the Jerusalem software greenhouse. Previously, in 1969, Dr. Burstin was a
founder of Advanced Technology Ltd. (ATL), one of Israel's largest software
companies, and served as its president until 1982. From 1982 to 1984 Dr.
Burstin was a Visiting Scholar at the Computer Science Department at UCLA and
Vice President, Technologies of Tadiran US. In this position he was in charge
of the acquisition of technologies and technology companies for Tadiran. Upon
his return to Israel in 1984 he became a Corporate Vice President of Tadiran
Ltd., then one of Israel's largest electronics companies, and President of
Tadiran's Systems Division. In 1986 he also became President of Elisra
Systems, an electronic warfare company acquired by Tadiran, and organized the
acquisition. In addition, Dr. Burstin served as a Chairman or Director of
several Tadiran subsidiaries including ATL (software), Contahal (software),
Mazlat (mini RPV) and Simtech (simulation systems). Dr. Burstin holds a PhD in
Information Systems from Tel Aviv University. He received B.Sc. degrees in
Physics and Mathematics and a M.Sc. degree in Physics from the Hebrew
University in Jerusalem.

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

         Benjamin (Benny) D. Gaon has been a Director of the Company since
1995. Mr. Gaon is President and Chairman of Israel-registered B. Gaon Holdings
Ltd., whose activities encompass four main sectors: financial and other
services; hi-tech and communications; agro-industries; and wholesale and
retail. Previously, Mr. Gaon served as President and CEO of Koor Industries
Ltd., Israel's largest industrial enterprise. Mr. Gaon is an active Chairman
and Board member of various companies in Israel, including Alrov (Israel) Ltd,
Or-Alon Ltd., MG/CAIB Future Markets Ltd., Gaon Assets Management (1999) Ltd.,
Hamashbir Fashion Warehouse Ltd., Hamashbir Holdings Ltd., B. Gaon Holdings
Ltd., Or Assaf Investments Ltd., Business Channel (T.T.V.) Ltd., Genius
Technologies Internet (1999) Ltd., B. Gaon Investments (1998) Ltd., Gaon Agro
Industries Ltd., Menorah Gaon Investment Company Ltd., Menora Gaon Capital
Markets Ltd., B. Gaon Productions Ltd. and Alon Technology Ventures Ltd. He
was the Chairman of the Board of Co-Op Blue Square Consumers' Cooperative
Society Ltd. and of Delek Israel Fuel Corporation Ltd. Among his other public
positions, Mr. Gaon serves as Chairman of the Israel-Jordan Chamber of
Commerce and as President of Israel Cancer Association. He also serves on the
Board of Trustees of the Hebrew University of Jerusalem and of Tel-Aviv
University.

         Zvi Zur has been a Director of the Company since February 1993. Mr.
Zur was Chairman of Carmel Olefins Ltd. and Chairman of Israel Petrochemicals
Ltd. until March 2000. He is a Lieutenant General (res.) in the Israel Defense
Forces, in which he served between 1948 and 1963, and was Chief of the General
Staff of the Israel Defense Forces between 1961 and 1963. Between 1963 and
1967 Mr. Zur was the Managing Director of Mekoroth Water Company and between
1967 and 1974 he served as Assistant Minister of Defense. Mr. Zur was Managing
Director of Clal Industries Ltd., and subsequently Vice President of Clal
(Israel) Ltd., between 1974 and 1985. During this period he also served on the
Boards of Directors of various subsidiaries of Clal, and was Chairman of the
Board of ECI Telecom Ltd. Between 1986 and 1987 Mr. Zur was Chairman of the
Board of Directors of Bezeq - The Israel Telecommunication Corp. Ltd. Between
1987 and 1992 he was the Deputy and Acting Chairman of The Israel Corporation,
and Chairman of the Board of Directors of Zim Israel Navigation Co. Ltd.
Between 1993 and 1996, Mr. Zur was Chairman of Israel Aircraft Industries Ltd.
Mr. Zur is also a member of the Board of Directors of Israel General Bank Ltd.

         Dr. Ran Giladi is President and Chief Executive Officer of
InfoCyclone Inc., a company he co-founded in September 2000, which produces
storage appliances for owners of massively accessed repositories. Dr. Giladi
was previously the founder and Head of the Department of Communication Systems
Engineering at Ben-Gurion University of the Negev, Beer Sheva from1992 until
2000). Prior to his position at Ben-Gurion University he taught at the
Business School and at the Electrical Engineering Department of Tel-Aviv
University from 1987 until 1993. Dr. Giladi co-founded Ramir Ltd., which was
later acquired by Adacom, and served as Vice President Research & Development
in both companies from 1984 until 1986. Dr. Giladi also founded the Israeli
Consortia for research on network management systems (NMS), and served as the
Chairman of the Consortia Board of Directors. His research interests include
computer and communications systems performance, data networks and
communications, and network management systems. Dr. Giladi received a B.A. in
Physics and an M.Sc. in Biomedical Engineering from the Technion - Israel
Institute of Technology, and a Ph.D. in Computers and Information Systems from
Tel-Aviv University.

         Yaacov Koren serves as a Director nominated by Comsor Venture Fund
LDC, an investor in the company. Mr. Koren is the Managing Director of
Comverse Investments Ltd., the investment division of Comverse Technology Inc.
(NASDAQ: CMVT). Additionally, Mr. Koren serves on the Boards of Directors of
several other companies, primarily Comverse subsidiaries, private companies in
which the Comverse group is invested and another publicly-traded company:
Ulticom, Inc. (Nasdaq: ULCM). Mr. Koren has over 20 years of experience in the
investment and financial industries. Prior to joining Comverse, Mr. Koren was
the Chief Executive Officer of Batucha Securities and Investments Ltd., one of
the largest Israeli brokerage and portfolio management companies. Mr. Koren
received his LL.B. degree from the Tel-Aviv University Law School in 1982.

         Karen Sarid is Chief Operating Officer and Chief Financial Officer of
Orex Computed Radiography Ltd. (advanced radiography systems for the digital
x-ray market), a position she has held since September 2000. From September
1999 until September 2000 she was Chief Financial Officer and a member of the
Board of Directors of Forsoft Ltd. (software solution), 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.
(medical lasers), a public company that is traded on NASDAQ. She was Chief
Financial Officer of the Company from 1993 through 1996. Ms. Sarid received a
B.A. in Economics and Accounting from Haifa University, and was awarded the
CFO of the Year award in 1998 by the Association of Chief Financial Officers
in Israel.

         Michal Sultan has been a Director of the Company since July 2000. She
is an Associate Vice President of Corporate Strategy and Business Development
at Comverse Ltd. Previously Ms. Sultan was an investment manager with Comverse
Investments Ltd., the investment division of Comverse Technology Inc. Ms.
Sultan has more than nine years of experience in the investment and financial
industries. Prior to joining Comverse in 1994, Mrs. Sultan was employed by
United Mizrahi Bank, first as a securities analyst and later as an investment
banker with United Mizrahi Bank's underwriting subsidiary. Ms. Sultan received
her MBA cum laude from the Hebrew University of Jerusalem.

Senior Management

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

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

         There are no family relationships between any director or executive
officer.

Outside and Independent Directors

         In accordance with Israel's Companies Law and the regulations
promulgated under the Companies Law, the Company must have two outside
directors. The outside directors must meet certain statutory requirements of
independence. The term of office of an outside director is three years, which
can be extended for one additional period of three years. An outside director
can be removed from office only under very limited circumstances. Both of the
outside directors must serve on the company's statutory audit committee, and
at least one outside director must serve on each committee of the board of
directors.

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

Audit Committee

         The Israeli Companies Law requires public companies to appoint an
audit committee. The responsibilities of the audit committee include
identifying irregularities in the management of the company's business and
approving related party transactions as required by law. An audit committee
must consist of at least three directors. 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. In addition, the
NASDAQ National Market requires that companies listed thereon must have at
least three independent directors, all of whom are financially literate and
one of whom has accounting or related financial management expertise. The
audit committee currently consists of Benjamin D. Gaon, Karen Sarid and Zvi
Zur.

Approval of Certain Transactions; Obligations of Directors, Officers and
Shareholders

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

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

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

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

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

         o any amendment to the articles of association;
         o an increase of the company's authorized share capital;
         o a merger; or
         o approval of related party transactions that require shareholder
           approval.

         In addition, any controlling shareholder, any shareholder who can
determine the outcome of a shareholder vote and any shareholder who, under the
company's articles of association, can appoint or prevent the appointment of
an office holder, is under a duty to act with fairness towards the company.
The Israeli Companies Law does not describe the substance of this duty.

Indemnification of Directors and Officers; Limitations on Liability

         Israeli law permits a company to insure an office holder in respect
of liabilities incurred by him or her as a result of the breach of his or her
duty of care to the company or to another person, or as a result of the breach
of his or her fiduciary duty to the company, to the extent that he or she
acted in good faith and had reasonable cause to believe that the act would not
prejudice the company. A company can also insure an office holder for monetary
liabilities as a result of an act or omission that he or she committed in
connection with his or her serving as an office holder. Moreover, a company
can indemnify an office holder for (a) monetary liability imposed upon him or
her in favor of other persons pursuant to a court judgment, including a
compromise judgment or an arbitrator's decision approved by a court, and (b)
reasonable litigation expenses, including attorneys' fees, actually incurred
by him or her or imposed upon him or her by a court, in an action, suit or
proceeding brought against him or her by or on behalf of the company or other
persons, or in connection with a criminal action which does not require
criminal intent in which he or she was convicted, in each case in connection
with his or her activities as an office holder. Our articles of association
allow us to insure and indemnify office holders to the fullest extent
permitted by law provided such insurance or indemnification is approved by the
audit committee. The Company has acquired directors' and officers' liability
insurance covering the officers and directors of the Company and its
subsidiaries for certain claims. In addition, we have entered into agreements
with our office holders to indemnify them against certain types of claims,
subject to dollar limits and other limitations. These agreements have been
ratified by our audit committee, board of directors and shareholders.


The documents concerning the Company which are referred to in this report are
available for review, subject to applicable restrictions, at the Company's
principal executive offices.

Compensation of Directors and Officers:

         The aggregate amount of compensation paid by the Company during 2002
to all its directors and officers as a group (5 persons) for services in all
capacities was approximately $272,000.

         The aggregate amount set aside or accrued by the Company during 2002
to provide pension, retirement or similar benefits for directors and officers
of the Company, pursuant to any existing plan provided or contributed to by
the Company, was approximately -$7,000.

Employees:

         On June 16, 2003, the Company had 93 employees: 3 LanOptics
employees, and 90 EZchip employees. Five of EZchip's employees are in the
U.S., involved in sales and marketing. Seventy of EZchip's employees are
engaged in research and development. The Company believes that it has good
relations with its employees and has never experienced a labor dispute, strike
or work stoppage.

                                 As of December 31st,
                                ----------------------
                                2000      2001    2002
                                ----      ----    ----

LanOptics employees               18         9       3

EZchip employees                  60        84      90

NetGuard employees                47        --      --

Total employees                  125        93      93


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

Share Ownership:

         To the best knowledge of the Company, no officer or director, other
than Messrs. Fruchter and Burstin, for whom we provide information below,
beneficially owns 1% or more of the outstanding Ordinary Shares. For
information regarding options held by officers and directors of the Company,
see "Options to Purchase Securities" below.

Options to Purchase Securities:

LanOptics Plan

         Since 1993, the Company has granted options to purchase Ordinary
Shares to key employees, directors and shareholders pursuant to the LanOptics
1992 Stock Option Plan as an incentive to attract and retain qualified
personnel. Under the terms of these grants, options, generally, become
exercisable ratably over a four-year period commencing with the date of grant.
The options generally expire no later than six years from the date of the
grant, and are non-transferable, except under the laws of succession.

         On December 13, 1998, the Company approved the re-pricing of all
outstanding options (435,375 options) to $2.50 per share (the market price on
the approval date was $1.19 per Ordinary Share), except for 12,000 options for
which the exercise price remained $5.00 per share.

         As of June 16, 2003, there were outstanding options to purchase
256,489 Ordinary Shares. Of these options, 249,989 options were exercisable at
exercise prices ranging from $2.50 to $6.00 per share. The number of options
held by directors and officers of the Company as a group was 221,489,
including options to purchase 194,739 Ordinary Shares held by Mr. Burstin.

EZchip Plan

         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" and
the "2001 U.S. Stock Option Plan"), as an incentive to attract and retain
qualified personnel. 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 -10 years from the date of the grant, and are
non-transferable, except under the laws of succession.

         As of June 16, 2003, there were outstanding options to purchase
ordinary shares of EZchip representing approximately 9% of the share capital
of EZchip on an as converted and fully diluted basis. Approximately 19.5% of
these options were held by directors and officers of the Company.

Item 7.      Major Shareholders and Related Party Transactions.

Major Shareholders:

         The following table sets forth certain information as of June 16,
2003 concerning (i) the only persons or entities known to the Company to own
beneficially more than 5% of the Company's outstanding Ordinary Shares, and
(ii) the number of Ordinary Shares beneficially owned by all Directors and
executive officers as a group:
<TABLE>
<CAPTION>

                                                                            Number of
    Name                                                                    Shares(1)       Percent
    ----                                                                    ----------      -------
<S>                                                                           <C>              <C>
    Apax Israel Partners II, L.P.
      and funds of which it is general partner(2) .................         1,013,858         12.0%
    Hanina Brandes ................................................          564,017           6.7%
    Eli Fruchter ..................................................          610,596           7.2%
    Comverse Group(3)  ............................................          788,785           9.3%
         ComSor Venture Fund LDC(3) ...............................          636,485           7.5%
         Comverse Technology, Inc.(3) .............................          145,800           1.7%
         CTI Capital Corp.(3) .....................................           6,500            0.1%
    All Directors and executive officers as a group (3 persons)(4)           825,585           9.5%
</TABLE>


(1)      The number of Ordinary Shares beneficially owned includes the shares
         issuable pursuant to stock options that are exercisable within 60
         days of June 16, 2003. Shares issuable pursuant to stock options are
         deemed outstanding for computing the percentage of the person holding
         such options but are not outstanding for computing the percentage of
         any other person.
(2)      The funds that hold the shares directly, of which Apax Israel
         Partners II, L.P. is a general partner, are Apax Israel II, L.P.,
         Apax Israel II (Israel), L.P., Apax Israel II Entrepreneur's Club,
         L.P., and Apax Israel II Entrepreneur's Club (Israel), L.P.
(3)      Comverse Technologies, Inc. owns 100% of the shares of CTI Capital
         Corp.  CTI Capital Corp. owns 50% of the shares of ComSor Venture
         Fund LDC.
(4)      As of June 16, 2003, all Directors and executive officers as a group
         (3 persons) held vested options exercisable into 214,989 Ordinary
         Shares at exercise prices ranging from $2.50 to $6.00. These options
         expire between 2003 and 2006.

Related Party Transactions:

         The following summarizes the Company's transactions with affiliates:
<TABLE>
<CAPTION>

                                                                              Year ended December 31,
                                                                              -----------------------
                                                                     2000               2001               2002
                                                                     ----               ----               ----
                                                                                   (in thousands)

<S>                                                                 <C>                 <C>                 <C>
Legal expenses paid to a law firm in which one of the               $120.0              $59.0               $79
Company's principal shareholders, Mr. Hanina Brandes, is a
senior partner.

</TABLE>


Item 8.      Financial Information.

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

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

Legal Proceedings:

         The Company is 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 the Company, and the Company is not aware of any threatened
litigation, which in the aggregate would be material to the business of the
Company.

Item 9.      Listing.

Price History of the Stock and Markets

         The Company's Ordinary Shares are quoted on the Nasdaq SmallCap
Market (prior to April 14, 2003, the Company's Ordinary Shares were traded on
The Nasdaq National Market) and on the Tel Aviv Stock Exchange under the
symbol "LNOP". The Company's listing on the Tel Aviv Stock Exchange was
accomplished pursuant to special dual listing rules applicable to companies
that are traded on The Nasdaq National Market. The Company is currently
exploring the implications for its Tel Aviv Stock Exchange listing and related
obligations of the change in its U.S. listing from The Nasdaq National Market
to the Nasdaq SmallCap Market.

         Set forth below are the high and low Nasdaq sales prices for the
Company's Ordinary Shares for each quarterly period since January 1, 1998 as
reported by The Nasdaq National Market prior to April 14, 2003, and as
reported by The Nasdaq SmallCap Market since that date, and the high and low
sales prices (in U.S. dollars) on the Tel Aviv Stock Exchange since April 1,
2002. Stock prices on the Tel Aviv Stock Exchange are quoted in New Israeli
Shekels (NIS); the stock prices set forth below in U.S. dollars reflect the
translation into U.S. dollars based on the rate of exchange published by the
Bank of Israel on the dates in question.

<TABLE>
<CAPTION>

                                                   Nasdaq                   Tel Aviv Stock Exchange
                                                   ------                   -----------------------
                                           High              Low            High              Low
                                           ----              ---            ----              ---
1998
----
<S>                                      <C>              <C>                 <C>             <C>
First quarter                            $ 4.000          $ 2.125
Second quarter                           $ 4.688          $ 2.813
Third quarter                            $ 4.438          $ 2.375
Fourth quarter                           $ 2.375          $ 1.000

1999
----
First quarter                            $ 3.438          $ 1.750
Second quarter                           $ 5.250          $ 3.375
Third quarter                            $ 5.813          $ 3.813
Fourth quarter                           $ 7.188          $ 3.875

2000
----
First quarter                           $ 43.750          $ 5.500
Second quarter                          $ 20.688          $ 5.625
Third quarter                           $ 36.000         $ 10.00
Fourth quarter                          $ 34.800          $ 9.600

2001
----
First quarter                           $ 19.250          $ 5.690
Second quarter                          $ 13.02          $ 35.690
Third quarter                            $ 9.740          $ 2.70
Fourth quarter                           $ 7.500          $ 2.840

2002
----
First quarter                           $ 14.00           $ 6.07
Second quarter                          $ 16.45           $ 5.02             $ 14.864           $ 8.995
Third quarter                            $ 8.98           $ 5.95              $ 9.569           $ 6.836
Fourth quarter                           $ 7.60           $ 3.79              $ 7.080           $ 6.160

2003
----
January                                  $ 6.2            $ 4.74              $ 6.86            $ 4.89
February                                 $ 5.2            $ 3.88              $ 4.78            $ 4.78
March                                    $ 5.0            $ 4.02              $ 4.86            $ 4.83
April                                    $ 5.35           $ 4.47              $ 5.749           $ 4.859
May                                      $ 7.76           $ 3.72              $ 7.713           $ 5.794
June, as of June 16                      $ 8.33           $ 7.13              $ 7.93            $ 7.77
</TABLE>



Item 10.     Additional Information.

Memorandum and Articles of Association

Objects and Purposes of the Company

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

Powers of the Directors

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

Rights Attached to Ordinary Shares

         Our authorized share capital consists of 30,000,000 Ordinary Shares,
par value NIS 0.02 per share. Holders of Ordinary Shares have one vote per
share, and are entitled to participate equally in the payment of dividends and
share distributions and, in the event of our liquidation, in the distribution
of assets after satisfaction of liabilities to creditors. No preferred shares
are currently authorized. All outstanding Ordinary Shares are validly issued
and fully paid.

Transfer of Shares and Notices

         Fully paid Ordinary Shares are issued in registered form and may be
freely transferred under our articles of association unless the transfer is
restricted or prohibited by another instrument. Under Israeli law and our
articles of association, each shareholder of record is entitled to receive at
least 21 days' prior notice of any shareholders' meeting.

Dividend and Liquidation Rights

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

Annual and Extraordinary General Meetings

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

         The quorum required for a meeting of shareholders consists of at
least two shareholders present in person or by proxy who hold or represent
between them at least 50% of the issued share capital. A meeting adjourned for
lack of a quorum generally is adjourned to the same day in the following week
at the same time and place or any time and place as the Chairman may determine
with the consent of the holders of a majority of the voting power represented
at the meeting in person or by proxy and voting on the question of
adjournment. At the reconvened meeting, the required quorum consists of any
two members present in person or by proxy.

Voting Rights

         Our Ordinary Shares do not have cumulative voting rights in the
election of directors. As a result, the holders of Ordinary Shares that
represent more than 50% of the voting power represented at a shareholders
meeting have the power to elect all of our directors, except the outside
directors whose election requires a special majority as described under the
section entitled "Item 6.
Directors, Senior Management and Employees; Outside and Independent Directors."

         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.

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

Limitations on the Rights to Own Securities

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

Anti-Takeover Provisions under Israeli Law

         The 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. This rule does not apply if there is already another shareholder of
the company with 25% or more of the voting rights. Similarly, the 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 50% or more of the voting rights in the company. These rules
do not apply if the acquisition is made by way of a merger. Regulations
promulgated under the Companies Law provide that these tender offer
requirements do not apply to companies whose shares are listed for trading
outside of Israel if, according to the law in the country in which the shares
are traded, including the rules and regulations of the stock exchange or which
the shares are traded, either:

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

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

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

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.

Exchange Rates

         On December 31, 2002, the representative exchange rate between the
NIS and the U.S. dollar as published by the Bank of Israel was NIS 4.737 =
$1.00. The table below sets forth, for the periods and dates indicated,
certain information concerning the representative U.S. dollar exchange rate
for NIS as published by the Bank of Israel for the years ended December 31,
1994 through 2002, and for 2003 through June 16.

<TABLE>
<CAPTION>

                                                        At End        Average
                                                       Of Period       Rate(1)        High           Low
                                                       ---------      --------        ----           ---
                                                       (NIS per $1.00)

<S>                      <C>                           <C>             <C>            <C>            <C>
                         1994                          3.02            3.01           3.06           2.96
                         1995                          3.14            3.08           3.18           2.90
                         1996                          3.25            3.19           3.30           3.08
                         1997                          3.54            3.45           3.59           3.24
                         1998                          4.16            3.79           4.37           3.55
                         1999                          4.15            4.14           4.26           4.04
                         2000                          4.04            4.07           4.19           3.96
                         2001                          4.416           4.203          4.416          4.067
                         2002                          4.737           4.7378         4.994          4.416
                         2003:
                         January                       4.814           4.8363         4.898          4.769
                         February                      4.810           4.8659         4.924          4.837
                         March                         4.687           4.781          4.858          4.687
                         April                         4.521           4.6185         4.671          4.521
                         May                           4.373           4.4779         4.577          4.373
                         June, as of June 16           4.354           4.3975         4.434          4.354
</TABLE>

 (1) The average of the daily exchange rates during the year/month.

Taxation:

Israeli Tax Considerations

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


Tax Reform

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

Statutory Corporate Tax Rate

         Israeli companies are generally subject to corporate tax at the rate
of 36% of their taxable income. In the Company's case, as described below, the
rate is currently effectively reduced.


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

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

         The Investment Law provides that a proposed capital investment in
eligible facilities may, upon application to the Investment Center of the
Ministry of Industry and Commerce of the State of Israel, be designated as an
"approved enterprise." Each certificate of approval for an approved enterprise
relates to a specific investment program delineated both by its financial
scope, including its capital sources, and by its physical characteristics,
e.g., the equipment to be purchased and utilized pursuant to the program.

         A company owning an approved enterprise may elect to receive an
alternative package of benefits. Under the alternative package, a company's
undistributed income derived from an approved enterprise will be exempt from
corporate tax for a period of up to ten years commencing in the first year of
taxable income, and taxed at a reduced corporate tax of 10% to 25% for the
remainder of the benefits period, depending on the extent of foreign
shareholders' ownership of the Company's ordinary shares. The tax benefits
relate only to taxable income attributable to specific approved enterprises.
If a company has more than one approval or only a portion of its capital
investments are approved, its effective tax rate is the result of a weighted
combination of the applicable rates. The benefits period is limited to twelve
years from completion of the investment under the approved plan or fourteen
years from the date of approval, whichever is earlier. The Investment Law also
provides that a company that has an approved enterprise is entitled to
accelerated depreciation on its property and equipment that are included in an
approved investment program. A Foreign Investors Company ("FIC"), defined in
the Investment Law as a company in which more than 25% of the share capital is
held by foreign shareholders, may enjoy benefits for a period of up to ten
years, or twelve years if it complies with certain export criteria stipulated
in the Investment Law (the actual length of the benefits period is graduated
based on the percentage of foreign ownership).

         The tax benefits applicable to an approved enterprise apply only to a
company's undistributed income. The Company currently intends to reinvest the
amount of its tax-exempt income and not to distribute such income as a
dividend. Dividends from approved enterprises are taxable at the reduced rate
of 15% if distributed during the tax exemption period or within twelve years
thereafter (this time limit does not apply to an FIC).


         EZchip has derived, and expects to continue to derive, a substantial
portion of its operating income from its "approved enterprise" facilities.

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


Special Provisions Relating to measurement of taxable income

         The Company measures its taxable income in accordance with the Income
Tax Law (Inflationary Adjustments), 1985, generally referred to as the
"Inflationary Adjustments Law," which represents an attempt to overcome the
problems presented to a traditional tax system by an economy undergoing rapid
inflation. Results of the Company for tax purpose are measured in terms of
earning in NIS after certain adjustments for changes in the Israeli Consumer
Price Index. The Inflationary Adjustments Law is highly complex.


     Capital Gains Tax Applicable to Shareholders

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

         Gains accrued before January 1, 2003 and derived from the sale of
shares of "industrial companies'' traded on specified non-Israeli markets,
including The Nasdaq National Market, are exempt from taxation. The Company
believes that it may no longer have been classified as an "industrial company"
beginning with the 2002 tax year. Another exemption may be available, however,
because the Company's shares became dual listed on the Tel-Aviv Stock Exchange
in 2002. Shareholders are advised to consult their tax advisors regarding the
availability of the exemption.

         Gains derived by Israeli shareholders on or after January 1, 2003
from the sale of shares of Israeli companies publicly traded on a recognized
stock exchange outside of Israel are subject to capital gains tax at a rate of
15%. The tax basis of shares acquired prior to January 1, 2003 will be
determined in accordance with the average closing share price in the three
trading days preceding January 1, 2003. Non-Israeli residents shall be exempt
from Israeli capital gains tax on any gains derived from the sale of shares
publicly traded on a stock exchange recognized by the Israeli Ministry of
Finance.

         The above rules regarding the taxation of capital gains do not apply
to: (1) dealers in securities; (2) in certain cases, shareholders who report
in accordance with the Income Tax Law (Inflationary Adjustment) - 1985; or (3)
shareholders who acquired their shares prior to the company's initial public
offering.

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

Taxation of Non-Resident Shareholders on Ordinary Income

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

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


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 state 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 (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. This discussion generally considers only U.S. Shareholders that will
hold the Ordinary Shares as capital assets for U.S. federal income tax
purposes and does not consider (a) all aspects of U.S. federal income taxation
that may be relevant to particular U.S. Shareholders by reason of their
particular circumstances (including potential application of the alternative
minimum tax), (b) U.S. Shareholders subject to special treatment under the
U.S. federal income tax laws, such as financial institutions, insurance
companies, broker-dealers, tax-exempt organizations, (c) U.S. Shareholders
owning, directly or by attribution, 10% or more of the LanOptic's outstanding
voting shares, (d) U.S. Shareholders who hold the Ordinary Shares as part of a
hedging, straddle or conversion transaction, (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.

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

         The following summary does not address the impact of a U.S.
Shareholder's individual tax circumstances. Accordingly, each U.S. Shareholder
should consult his or her tax advisor as to the particular tax consequences to
him or her of an investment in the Ordinary Shares, including the effects of
applicable state, local or non-U.S. tax laws and possible changes in the tax
laws.


Distributions Paid on the Ordinary Shares

         A U.S. Shareholder generally will be required to include in gross
income as dividend income, the amount of any distributions paid in respect of
the Ordinary Shares (including the amount of any Israeli taxes withheld
therefrom) to the extent that such distributions are paid out of the
LanOptic's current and 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 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 Israeli shekels 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 Israeli shekels.


Credit for Israeli Taxes Withheld

         Subject to certain conditions and limitations, any Israeli tax
withheld or paid with respect to dividends on the Ordinary Shares will
generally be eligible for credit against a U.S. Shareholder's U. S. federal
income tax liability at such U.S. Shareholder's election. The Code provides
limitations on the amount of foreign tax credits that a U.S. Shareholder may
claim, including extensive separate computation rules under which foreign tax
credits allowable with respect to specific categories of income cannot exceed
the U. S. federal income taxes otherwise payable with respect to each such
category of income. U.S. Shareholders that do not elect to claim a foreign tax
credit may instead claim a deduction for Israeli income tax withheld or paid,
but only for a year in which such U.S. Shareholders elect to do so for all
non-U.S. income taxes. Dividends with respect to the Ordinary Shares will
generally be classified as foreign source "passive income" for the purpose of
computing a U.S. Shareholder's foreign tax credit limitations for U.S. foreign
tax credit purposes. 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.


Sale, Exchange or Other Disposition of the Ordinary Shares

         The sale, exchange or other disposition of Ordinary Shares will
generally result in the recognition of capital gain or loss in an amount equal
to the difference between the amount realized on the sale or exchange
(determined at the spot rate on the settlement date of the sale) 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 tax treaty
between the United States and Israel, gain derived from the sale, exchange or
other disposition of Ordinary Shares by a holder who is a resident of the
United States for purposes of the treaty and who sells the Ordinary Shares
within Israel may be treated as foreign source income for U.S. foreign tax
credit purposes.


Recent Tax Legislation

         The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the
"Act"), enacted on May 28, 2003, generally reduces the maximum rate of tax
imposed on certain dividends received by U.S. Shareholders that are
individuals to 15 percent (5 percent for individuals in the lower tax brackets
and 0 percent for such individuals in 2008) (the "Reduced Rate"). The Reduced
Rate applies to dividends received after December 31, 2002 and before January
1, 2009, provided that certain holding period requirements are met. In order
for dividends paid by a foreign corporation to be eligible for the Reduced
Rate, the foreign corporation must be a "qualified foreign corporation" within
the meaning of the Act and cannot be a passive foreign investment company or a
foreign personal holding company. We believe that we will be considered a
"qualified foreign corporation" within the meaning of the Act because our
Ordinary Shares are listed on The Nasdaq Small Cap Market and that we will not
be a passive foreign investment company (as discussed below) or a foreign
personal holding company for the taxable year ended December 31, 2001. Thus,
any distributions we make that are treated as taxable dividends should qualify
for the Reduced Rate. There can be no assurance, however, that we will
continue to be considered a "qualified foreign corporation" and that we will
not become a passive foreign investment company or foreign personal holding
company in the future.

         The Act also reduces the top individual tax rate on adjusted net
capital gains for sales and exchanges of capital assets on or after May 6,
2003 and before January 1, 2009 from 20 percent (10 percent for individuals in
the lower tax brackets) to 15 percent (5 percent for individuals in the lower
tax brackets and 0 percent for these taxpayers in 2008).


Passive Foreign Investment Company Status

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

         Although not free from doubt, based on our current and projected
income, assets and activities, we believe that we will not be classified as a
PFIC for our taxable year ending on December 31, 2002 or any subsequent
taxable year. However, there can be no assurance that we will not in fact be
considered to be a PFIC for our taxable year ending on December 31, 2002 or
any other subsequent year because (i) the determination of whether or not we
are a PFIC will be based on the composition of our income and assets and can
be definitively made only after the end of each taxable year, (ii) the value
of our stock has been volatile historically, (iii) we own substantial amount
of assets such as cash and marketable securities which are considered as
passive asset for purposes of the PFIC rules and (iv) the legal and financial
analysis to determine whether a company is a PFIC is not entirely clear. In
particular, there is no authority describing the permissible methods to
determine the average value of the assets of a corporation in a particular
taxable year. Therefore, there is no assurance that our belief regarding PFIC
status will not be challenged by the U.S. Internal Revenue Service (the "IRS")
or that a court will not sustain such challenge.

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

         U.S. Shareholders may avoid taxation under the rules described above
by making (i) a "qualified electing fund" election for the first taxable year
in which we are a PFIC to include such U.S. Shareholder's share of our
ordinary earnings and net capital gain on a current basis or (ii) a "deemed
sale" election in a subsequent year, along with a qualified electing fund
election, if we are still classified as a PFIC. A qualified electing fund
election remains in effect until revoked by the IRS.

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

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

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

         Both elections are subject to a number of specific rules and
requirements, and U.S. Shareholders are strongly urged to consult their tax
advisors concerning these elections if we become a PFIC.


Backup Withholding and Information Reporting.

         Under certain circumstances, U. S. information reporting and/or
backup withholding of U.S. federal income tax 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.

Documents on Display

         We are subject to certain of the information reporting requirements
of the Securities and Exchange Act of 1934, as amended. We, as a "foreign
private issuer," are exempt from the rules and regulations under the
Securities Exchange Act prescribing the furnishing and content of proxy
statements, and our officers, directors and principal shareholders are exempt
from the reporting and "short-swing" profit recovery provisions contained in
Section 16 of the Securities Exchange Act, with respect to their purchase and
sale of the Ordinary Shares. In addition, we are not required to file reports
and financial statements with the Securities and Exchange Commission as
frequently or as promptly as U.S. companies whose securities are registered
under the Securities Exchange Act. However, we will file with the Securities
and Exchange Commission an annual report on Form 20-F containing financial
statements audited by an independent accounting firm. We will also furnish
quarterly reports on Form 6-K containing unaudited financial information after
the end of each of the first three quarters.

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

Item 11.     Quantitative and Qualitative Disclosures About Market Risk.

         The dollar cost of our operations is influenced by the extent to
which any increase in the rate of inflation in Israel is partially offset, or
is offset on a lagging basis, by the devaluation of the NIS in relation to the
U.S. dollar. Inflation in Israel will have a negative effect on the
profitability of our contracts, under which we are to receive payment in U.S.
dollars or dollar-linked NIS while incurring expenses in NIS linked to the
CPI, unless such inflation is offset by a devaluation of the NIS.

         Until 1997, inflation in Israel generally exceeded the devaluation of
the NIS against the U.S. dollar, and we experienced increases in the dollar
cost of our operations in Israel. In 1995 and 1996, the rate of inflation in
Israel was 8.1% and 10.6%, respectively, and the devaluation of the NIS
against the U.S. dollar was 3.9% and 3.7%, respectively. This trend was
reversed during 1997, 1998 and 1999, when the rate of inflation was 7.0%,
8.6%, 1.3%, respectively, and the rate of devaluation was 8.8%, 17.6% and
2.3%, respectively. During 2000 this trend was reversed when the NIS increased
at the rate of 2.7% compared to the U.S. dollar, while the inflation rate was
0%, causing us to experience increases in the dollar cost of our operations in
Israel. In 2001 and 2002 this trend was reversed again, with the rate of
inflation at 1.4% and 6.5%, respectively, and the rate of devaluation at 8.31%
and 7.3%, respectively. There can be no assurance that this reversal will
continue or that we will not be materially adversely affected in the future if
inflation in Israel exceeds the devaluation of the NIS against the dollar, or
if the timing of such devaluation lags behind increases in inflation in
Israel.

         A devaluation of the NIS in relation to the U.S. dollar has the
effect of decreasing the U.S. dollar value of any of our assets that consists
of NIS (unless such assets are linked to the dollar). Such a devaluation also
has the effect of reducing the dollar amount of any of our expenses or
liabilities that are payable in NIS (unless such expenses or payables are
linked to the dollar). Conversely, any increase in the value of the NIS in
relation to the U.S. dollar has the effect of increasing the U.S. dollar value
of any of our unlinked NIS assets and the dollar amounts of any of our
unlinked NIS liabilities and expenses.

         Because exchange rates between the NIS and the U.S. dollar fluctuate
continuously, exchange rate fluctuations and especially larger periodic
devaluation will have an impact on our profitability and period-to-period
comparisons of our results. The effects of foreign currency re-measurements
are reported in the Consolidated Financial Statements in current operations.

Item 12.     Description of Securities Other Than Equity Securities


             Not applicable.


                                    PART II

Item 13.     Defaults, Dividend Arrearages and Delinquencies.


             Not applicable.

Item 14.     Material Modifications to the Rights of Security Holders and Use
             of Proceeds.


             Not applicable.


                                   PART III


Item 17.     Financial Statements.

             Not applicable.

Item 18.     Financial Statements.

             Attached hereto.

Item 19.     Exhibits.


Exhibit Number        Description

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

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

10.2                  Consent of Kost Forer & Gabbay.

10.3                  Statement Pursuant to 18 U.S.C. Section 1350.



                                  SIGNATURES

         Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements
for filing on Form 20-F and has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.



                                    LANOPTICS LTD.


                                    /s/ Dr. Meir D. Burstin
                                    ----------------------------------
                                    Dr. Meir D. Burstin
                                    Chairman of the Board of Directors



Date: June 19, 2003

<PAGE>

                                 CERTIFICATION

I, Dr. Meir D. Burstin, certify that:

1.    I have reviewed this annual report on Form 20-F of of LanOptics Ltd.
      (the "Registrant");

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary
      to make the statements made, in light of the circumstances under which
      such statements were made, not misleading with respect to the period
      covered by this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all
      material respects the financial condition, results of operations and
      cash flows of the Registrant as of, and for, the periods presented in
      this annual report;

4.    The Registrant's other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
      we have:

a)    designed such disclosure controls and procedures to ensure that material
      information relating to the Registrant, including its consolidated
      subsidiaries, is made known to us by others within those entities,
      particularly during the period in which this annual report is being
      prepared;

b)    evaluated the effectiveness of the Registrant's disclosure controls and
      procedures as of a date within 90 days prior to the filing date of this
      annual report (the "Evaluation Date"); and

c)    presented in this annual report our conclusions about the effectiveness
      of the disclosure controls and procedures based on our evaluation as of
      the Evaluation Date;

5.    The Registrant's other certifying officers and I have disclosed, based
      on our most recent evaluation, to the Registrant's auditors and the
      audit committee of Registrant's board of directors (or persons
      performing the equivalent function):

a)    all significant deficiencies in the design or operation of internal
      controls which could adversely affect the Registrant's ability to
      record, process, summarize and report financial data and have identified
      for the Registrant's auditors any material weaknesses in internal
      controls; and

b)    any fraud, whether or not material, that involves management or other
      employees who have a significant role in the Registrant's internal
      controls; and

6.    The Registrant's other certifying officers and I have indicated in this
      annual report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.

Date: June 19, 2003                       /s/ Dr. Meir D. Burstin
                                          -----------------------------
                                             Dr. Meir D. Burstin
                                                  Chairman
<PAGE>

                                 CERTIFICATION

I, Dror Israel, certify that:

1.   I have reviewed this annual report on Form 20-F of of LanOptics Ltd. (the
     "Registrant");

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary
     to make the statements made, in light of the circumstances under which
     such statements were made, not misleading with respect to the period
     covered by this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the Registrant as of, and for, the periods presented in this
     annual report;

4.   The Registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
     we have:

a)   designed such disclosure controls and procedures to ensure that material
     information relating to the Registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

b)   evaluated the effectiveness of the Registrant's disclosure controls and
     procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

c)   presented in this annual report our conclusions about the effectiveness
     of the disclosure controls and procedures based on our evaluation as of
     the Evaluation Date;

5.   The Registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the Registrant's auditors and the audit
     committee of Registrant's board of directors (or persons performing the
     equivalent function):

a)   all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     Registrant's auditors any material weaknesses in internal controls; and

b)   any fraud, whether or not material, that involves management or other
     employees who have a significant role in the Registrant's internal
     controls; and

6.   The Registrant's other certifying officers and I have indicated in this
     annual report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and
     material weaknesses.

Date: June 19, 2003                          /s/ Dror Israel
                                             ---------------------------
                                             Dror Israel
                                             Chief Financial Officer


<PAGE>




                      LANOPTICS LTD. AND ITS SUBSIDIARIES


                       CONSOLIDATED FINANCIAL STATEMENTS


                            AS OF DECEMBER 31, 2002


                                IN U.S. DOLLARS




                                     INDEX



                                                                       Page

Report of Independent Auditors                                            2

Consolidated Balance Sheets                                             3 - 4

Consolidated Statements of Operations                                     5

Statements of Changes in Shareholders' Equity                             6

Consolidated Statements of Cash Flows                                   7 - 8

Notes to Consolidated Financial Statements                             9 - 39


<page>

<table>
<caption>


                            <c>                              <c>
[ERNST & YOUNG LOGO OMITTED]   |X|  Kost Forer & Gabbay       |X|   Phone:  972-3-6232525
                                    3 Aminadav St.                  Fax:    972-3-5622555
                                    Tel-Aviv 67067, Israel

</table>



                        REPORT OF INDEPENDENT AUDITORS

                            To the Shareholders of

                                LANOPTICS LTD.


         We have audited the accompanying consolidated balance sheets of
LanOptics Ltd. ("the Company") and its subsidiaries as of December 31, 2002
and 2001, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. 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 auditing standards
generally accepted in the United States and in Israel, including those
prescribed by the Auditors' Regulations (Auditor's Mode of Performance), 1973.
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, 2002 and 2001,
and the consolidated results of their operations and cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in Israel which differ in certain
respects from those followed in the United States (see Note 16 to the
consolidated financial statements).



Tel-Aviv, Israel                                    KOST FORER & GABBAY
February 11, 2003                            A Member of Ernst & Young Global


<page>

<table>
<caption>

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

                                                                               December 31,
                                                                    -------------------------------------
                                                                         2002                2001
                                                                    -----------------   -----------------

     ASSETS

 CURRENT ASSETS:

                                                                       <c>                   <c>
  Cash and cash equivalents                                               $ 4,036               $ 2,798
  Marketable securities                                                     6,644                17,673
  Trade receivables                                                           362                  --
  Other accounts receivable and prepaid expenses (Note 3)                     532                   296
  Inventories (Note 4)                                                        377                  --
                                                                          -------               -------

Total current assets                                                       11,951                20,767
                                                                          -------               -------

LONG-TERM INVESTMENTS:
  Prepaid development and production costs (Note 5)                           777                 1,325
  Severance pay fund                                                          939                   686
                                                                          -------               -------

Total long-term investments                                                 1,716                 2,011
                                                                          -------               -------

PROPERTY AND EQUIPMENT, NET (Note 6)                                        1,021                 1,281
                                                                          -------               -------

OTHER ASSETS (Note 1d, 7)
  Technology, net                                                           1,318                  --
  Goodwill, net                                                             1,574                  --
                                                                          -------               -------

                                                                            2,892                  --
                                                                          -------               -------

ASSETS ATTRIBUTED TO DISCONTINUED OPERATIONS                                 --                     161
                                                                          -------               -------

Total assets                                                              $17,580               $24,220
                                                                          =======               =======


The accompanying notes are an integral part of the consolidated financial statements.
</table>


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

<table>
<caption>

                                                                             December 31,
                                                                      -----------------------------
                                                                          2002             2001
                                                                      ------------    -------------

      LIABILITIES AND SHAREHOLDERS' EQUITY

 CURRENT LIABILITIES:

                                                                       <c>               <c>
   Trade payables                                                         $    506          $    322
   Other accounts payable and accrued expenses (Note 8)                      2,296             1,420
                                                                          --------          ---------

Total current liabilities                                                    2,802             1,742
                                                                          -------           ---------

ACCRUED SEVERANCE PAY                                                        1,196               990
                                                                          --------          ---------

PREFERRED SHARES IN A SUBSIDIARY (Note 1d)                                   5,567            15,295
                                                                          --------          ---------

LIABILITIES ATTRIBUTED TO DISCONTINUED OPERATIONS                              214               670
                                                                          --------          ---------

COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)

SHAREHOLDERS' EQUITY:
   Share capital (Note 10):
     Ordinary shares of NIS 0.02 par value -
     Authorized: 10,000,000  shares at December 31, 2002 and 2001;
     Issued and outstanding: 8,465,535 and 7,290,777 shares at
     December 31, 2002 and 2001, respectively                                   60                56
     Deferred shares of NIS 1 par value -
     Authorized,  issued and outstanding:  0 and 1,000 shares
     at December 31, 2002 and 2001, respectively                              --              (*  --
   Additional paid-in capital                                               33,743            24,792
   Accumulated deficit                                                     (26,002)          (19,325)
                                                                          --------          ---------

Total shareholders' equity                                                   7,801             5,523
                                                                          --------          ---------

Total liabilities and shareholders' equity                                $ 17,580          $ 24,220
                                                                          ========          ========


*) Represents an amount lower than $1.


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


         February 11, 2003
------------------------------------        -------------------------------------        -----------------------------------
      Date of approval of the                           Dror Israel                               Meir D. Burstin
       financial statements                       Chief Financial Officer                             Chairman

</table>


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

<table>
<caption>


                                                                                      Year ended December 31,
                                                                         --------------------------------------------------
                                                                             2002              2001              2000
                                                                         --------------    --------------    --------------


                                                                          <c>               <c>               <c>
Revenues (Note 12)                                                           $       465       $      --         $      --
Costs of revenues                                                                    164              --                --
Amortization of developed technology                                                 107              --                --
                                                                             -----------       -----------       -----------

Gross profit                                                                         194              --                --
                                                                             -----------       -----------       -----------

Operating expenses:
  Research and development, net                                                    8,153             7,434             4,530
  In-process research and development write-off                                    4,655              --                --
  Selling and marketing, net                                                       1,913             1,327               510
  General and administrative                                                       1,288             1,005               979
  Amortization of goodwill                                                            60              --                --
                                                                             -----------       -----------       -----------

                                                                                  16,069             9,766             6,019
                                                                             -----------       -----------       -----------

Operating loss                                                                   (15,875)           (9,766)           (6,019)
Financial income, net (Note 13a)                                                     659             1,427               726
Other income, net (Note 13b)                                                        --                 814               465
                                                                             -----------       -----------       -----------

Loss from continuing operations, before minority interest                        (15,216)           (7,525)           (4,828)
Minority interest in losses of subsidiaries                                        8,488             7,082             2,997
                                                                             -----------       -----------       -----------

Loss from continuing operations                                                   (6,728)             (443)           (1,831)
                                                                             -----------       -----------       -----------

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

Net income (loss)                                                            $    (6,677)      $       350       $    (6,600)
                                                                             ===========       ===========       ===========

Net loss per share from continuing operations                                $     (0.87)      $     (0.06)      $     (0.27)
                                                                             ===========       ===========       ===========

Net earnings (loss) per share from discontinued operations                   $      0.01       $      0.11       $     (0.70)
                                                                             ===========       ===========       ===========

Net earnings (loss) per share                                                $     (0.86)      $      0.05       $     (0.97)
                                                                             ===========       ===========       ===========

Weighted average number of Ordinary shares used in computing net
  earnings (loss) per share                                                    7,782,593         7,350,027         6,804,043
                                                                             ===========       ===========       ===========



The accompanying notes are an integral part of the consolidated financial statements.
</table>


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

<table>
<caption>

                                         Number of shares
                                  ------------------------------              Additional                    Total
                                     Ordinary       Deferred        Share     paid-in      Accumulated   shareholders'
                                      shares         shares        capital     capital       deficit       equity
                                  --------------------------------------------------------------------------------------


                                   <c>              <c>     <c>          <c>           <c>           <c>
Balance as of January 1, 2000         6,584,335        1,000   $       52   $   24,124    $  (13,075)   $   11,101

Net loss                                   --           --            --           --         (6,600)       (6,600)
Exercise of options                      92,125         --          (*--           403         --              403
Exercise of warrants                    608,192         --              4          250         --              254
                                     ----------    ----------   ----------   ----------   ----------    ----------

Balance as of December
31, 2000                              7,284,652        1,000           56       24,777       (19,675)        5,158

Net income                                 --           --            --           --            350           350
Exercise of options                       6,125         --          (*--            15         --               15
                                     ----------    ----------   ----------   ----------   ----------    ----------

Balance as of December
31, 2001                              7,290,777        1,000           56       24,792       (19,325)        5,523

Net loss                                   --           --            --           --         (6,677)       (6,677)
Issuance of shares                    1,153,508         --              4        8,898         --            8,902
Exercise of options                      21,250         --          (*--            53         --               53
Retirement of deferred
shares                                     --         (1,000)         --           --          --              --
                                    -----------    ----------   ----------  ----------    -----------    ----------

Balance  as  of  December
31, 2002                              8,465,535         --      $      60   $   33,743    $  (26,002)   $    7,801
                                    ===========    ==========   ==========  ==========   -============    ==========




*) Represents an amount lower than $1.

The accompanying notes are an integral part of the consolidated financial statements.
</table>

<table>
<caption>

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


                                                                                      Year ended December 31,
                                                                         --------------------------------------------------
                                                                             2002              2001              2000
                                                                         --------------    --------------    --------------

 Cash flows from operating activities:

                                                                          <c>                <c>               <c>
 Net income (loss)                                                           $  (6,677)         $    350          $ (6,600)
 Adjustments to reconcile net income (loss) to net cash used in
   operating activities:
   Depreciation and amortization                                                   862               468               275
   Amortization of prepaid production and development costs                        548               542               267
   Write-off of in-process research and development                              4,655                 -                 -
   Gain on sale of marketable securities and short-term bank deposits             (587)           (1,308)             (616)
   Minority interest in losses of subsidiaries                                  (8,488)           (7,082)           (2,997)
   Gain on sale of property and equipment                                            -                (5)              (13)
   Increase in trade receivables                                                  (362)                -                 -
   Increase in other accounts receivable and prepaid expenses                     (236)             (178)              (60)
   Increase in inventory                                                          (377)                -                 -
   Increase (decrease) in trade payables                                           184              (116)              388
   Increase (decrease) in other accounts payable and accrued expenses              876               296            (1,274)
   Accrued severance pay, net                                                      (47)              129               100
                                                                         --------------    --------------    --------------

 Net cash used in continuing operating activities                               (9,649)           (6,904)          (10,530)
 Net cash provided by (used in) discontinued operations                           (294)           (2,639)            3,680
                                                                         --------------    --------------    --------------

 Total net cash used in operating activities                                    (9,943)           (9,543)           (6,850)
                                                                         --------------    --------------    --------------

 Cash flows from investing activities:
 Investment in short-term bank deposits                                              -                 -           (10,500)
 Investment in marketable securities                                            (3,142)          (12,523)          (14,222)
 Proceeds from short-term bank deposits                                              -            10,997               834
 Proceeds from sale of marketable securities                                    14,758            10,248             8,976
 Purchase of property and equipment                                               (435)           (1,105)             (698)
 Proceeds from sale of property and equipment                                        -                70                23
                                                                         --------------    --------------    --------------

 Net cash provided by (used in) investing activities                            11,181             7,687           (15,587)
                                                                         --------------    --------------    --------------



The accompanying notes are an integral part of the consolidated financial statements.
</table>


<table>
<caption>

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

                                                                                     Year ended December 31,
                                                                         -------------------------------------------------
                                                                              2002               2001              2000
                                                                         --------------    ---------------    -------------

                                                                             <c>                <c>               <c>
 Cash flows from financing activities:
Proceeds from issuance of subsidiary's Preferred
  shares to a third party, net                                                --                 --               25,179
Proceeds from exercise of options and warrants                                  53                 15                656
Issuance expenses                                                              (53)              --                 --
                                                                          --------           --------           --------

Net cash provided by financing activities                                     --                   15             25,835
                                                                          --------           --------           --------

Increase (decrease) in cash and cash equivalents                             1,238             (1,841)             3,398
Cash and cash equivalents at the beginning of the year                       2,798              4,639              1,241
                                                                          --------           --------           --------

Cash and cash equivalents at the end of the year                          $  4,036           $  2,798           $  4,639
                                                                          ========           ========           ========

Non-cash activities:
Development and production costs upon issuance
  of subsidiary's Ordinary shares:
  Development and production costs                                        $   --             $   --             $  2,134
  Deferred gain from issuance of subsidiary's
    Ordinary shares to a third party                                          --                 --               (1,938)
  Minority interest                                                           --                 --                 (196)
                                                                          --------           --------           --------

                                                                          $   --             $   --             $   --
                                                                          ========           ========           ========

Investment in a subsidiary against issuance of shares:
Other assets                                                              $ (3,060)          $   --             $   --
Preferred shares in a subsidiary                                            (1,240)              --                 --
In-process research and development                                         (4,655)              --                 --
                                                                          --------           --------           --------

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





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

</table>



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


NOTE 1:- GENERAL

         a.    LanOptics Ltd. was incorporated as a limited liability company
               under the laws of the State of Israel in 1989. Until 1999, the
               Company's principal business was the development, manufacturing
               and marketing of LANs and WANs networking equipment. In
               addition LanOptics operated in the business of Internet
               applications, through two independent business units, the
               NetGuard subsidiary, which operations have been ceased in early
               2001 and the NetXchange subsidiary which operations ceased in
               1998. LanOptics is now operating in the segment of network
               processors, through its independent business unit, E.Z. Chip
               Technologies Ltd., or EZchip, which is engaged in the
               development of high performance network processors.

               EZchip Technologies Ltd. was established in December 1999 as a
               wholly-owned subsidiary of the Company, following LanOptics
               decision to cease the research and development of new switching
               products for LANs and instead focus on its internal ASIC design
               team (which developed ASICs for LanOptics products). This team
               began working on the development of network processors and was
               incorporated as the EZchip subsidiary in December 1999. During
               2001, EZchip established a wholly owned subsidiary, EZchip
               Inc., in the United States, which is engaged in the marketing
               of the EZchip products.

               The Company's Ordinary Shares are quoted on the Nasdaq
               Small-Cap Market and on the Tel-Aviv Stock Exchange under the
               symbol "LNOP". Prior to April 14, 2003, the Company's Ordinary
               Shares were traded on the Nasdaq National Market.

         b.    As mentioned above, on February 5, 2001, the management decided
               to close NetGuard's activities, which developed and marketed
               Internet security software applications such as Guardian Pro
               that includes Guardian Firewall and Bandwidth control software.
               As discussed above, this determination along with those taken
               in 1998 regarding the closure of NetXchange comprised the
               discontinuation of the Internet applications segment. The
               Company accounted for the closing of NetGuard in accordance
               with APB- 30 "Reporting the Results of Operations-Reporting the
               Effects of Disposal of a Segment of a Business, and
               Extraordinary, Unusual and Infrequently Occurring Events and
               Transactions" ("APB- 30") and EITF 95-18 "Accounting and
               Reporting for a Discontinued Business Segment When the
               Measurement Date Occurs after The Balance Sheet Date but Before
               the Issuance of Financial Statements" ("EITF 95-18").

               As a result of the NetGuard's closure as mentioned above, the
               results of operations of NetGuard were reported separately as
               discontinued operations in the statements of operations for the
               two years in the period ended December 31, 2001, and are
               summarized as follows:

<table>
<caption>

                                                                       Year ended December 31,
                                                                  -------------------------------
                                                                        2001            2000
                                                                  ---------------   -------------


                                                                  <c>             <c>
               Revenues                                              $   1,092       $ 5,125
               Cost of revenues                                           (260)       (1,745)
               Research and development expenses                          (126)       (1,110)
               Selling, general and administrative expenses               (504)       (8,453)
               Financial income (expenses)                                  19           (69)
                                                                     ------------   -------------

               Net income (loss)                                     $     221       $(6,252)
                                                                     ============   =============
</table>

         c.    On December 31, 2002, following two quarters of minimal
               operations related to the networking solutions products
               ("Legacy products), and based on management expectations for
               minimal future operations related to these products, management
               decided to account for its legacy operations as a
               discontinuation of a business in accordance with Accounting
               Standard No. 8 of the Israel Accounting Standards Board,
               "Discontinuing Operations" in the financial statements as of
               December 31, 2002. Accordingly, the results of operations of
               the legacy operations for the three years ended December 31,
               2002 have been reported separately as discontinued operations
               in the statements of operations. In addition, the assets and
               liabilities attributed to the discontinued operations have been
               reported separately in the balance sheets as of December 31,
               2001 and 2002.

               The results of operations of legacy operations are summarized
               as follows:

<table>
<caption>

                                                                                    Year ended December 31,
                                                                     ---------------------------------------------------
                                                                          2002               2001                2000
                                                                     ----------------   ----------------    ------------


                                                                      <c>             <c>                 <c>
               Revenues                                                  $ 61            $ 1,449             $ 3,227
               Cost of revenues                                            (5)            (1,049)             (1,704)
               Research and development expenses                            -                  -                 132
               Selling, general and administrative expenses                (5)              (197)               (172)
               Other income, net                                            -                346                   -
               Minority  interest in losses of a subsidiary                 -                 23                   -
                                                                       --------         ----------          ---------
               Net income                                                $ 51            $   572             $ 1,483
                                                                       ========         ==========          =========
</table>

         d.    In early 2000, EZchip issued 7,776,111 Preferred A shares in
               consideration of $ 5,519. In late 2000, EZchip issued 7,198,453
               Preferred B shares for a total consideration of $ 21,660, of
               which the Company has invested $ 2,000. The amount of $ 25,179
               which was invested by a third party, was recorded as Preferred
               shares in a subsidiary.

               In addition, during 2000, EZchip issued 2,103,924 Ordinary
               shares to IBM at $ 1.02 per share in consideration of
               development and production services to be performed. (See Note
               6).

               On August 19, 2002, the Company acquired 2,777,778 Preferred A
               shares and 737,462 Preferred B shares of EZchip, in
               consideration of the issuance of 1,153,508 Ordinary shares of
               the Company. The total fair value of the Ordinary shares issued
               for the acquisition is $8,956 (determined, based on the average
               price of LanOptics' Ordinary shares two day before and after
               the announcement date of the transaction). The transaction was
               accounted for according to the purchase method of accounting,
               and accordingly, the purchase price has been allocated to the
               assets acquired and liabilities assumed based upon their
               estimated fair values at the date of acquisition.

               The preliminary purchase price allocation is as follows:

               EZchip Preferred A and B shares acquired             $   1,440
               Intangible assets acquired:
                  In-process research and development                   4,655
                  Technology (1)                                        1,425
                  Goodwill (2)                                          1,634
               Liabilities assumed                                       (198)
                                                                    ----------
               Total consideration                                  $   8,956
                                                                    ==========

               (1)    The technology is amortized using a straight-line method
                      over the useful life of the technology, which is five
                      years.

               (2)    The goodwill is amortized over a period of 10 years,
                      using the straight-line method.

               As of December 31, 2002, the Company holds 66% of EZchip.

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

         f.    As for percentage of ownership and control in subsidiaries, see
               Note 15.


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

               The Company's consolidated financial statements have been
               prepared in accordance with Generally Accepted Accounting
               Principles in Israel ("Israeli GAAP"). Israeli GAAP and
               Accounting Principles Generally Accepted in the United States
               ("U.S. GAAP") that differ in certain respects as applicable to
               the consolidated financial statements of the Company (see Note
               16).

         a.    Use of estimates:

               The preparation of financial statements in conformity with
               generally accepted accounting principles requires management to
               make estimates and assumptions that affect the amounts reported
               in the financial statements and accompanying notes. Actual
               results may differ from those estimates.

         b.    Financial statements in U.S. dollars:

               The transactions of the Company and EZchip are recorded in new
               Israeli shekels ("NIS"), however, since the majority of their
               sales are made in U.S. dollars ("dollars") and the Company's
               shares are traded on a foreign stock exchange, the Company and
               its subsidiaries have elected to adjust their financial
               statements according to the changes in the exchange rate of the
               U.S. dollar, in conformity with Section 29b to Statement of
               Opinion 36 of the Institute of Certified Public Accountants in
               Israel.

               Accordingly, transactions and balances originally denominated
               in dollars are presented at their original amounts. Non-dollar
               transactions and balances are recorded at the exchange rate at
               the date of the transaction. The effects of foreign currency
               remeasurement are included in the statement of operations as
               financial income or expenses, as appropriate.

         c.    Principles of consolidation:

               The consolidated financial statements include the accounts of
               the Company and its majority owned subsidiaries. Intercompany
               balances and transactions have been eliminated upon
               consolidation.

         d.    Cash equivalents:

               Cash equivalents are short-term highly liquid investments that
               are readily convertible to cash with original maturities of
               three months or less.

         e.    Short-term bank deposits:

               The Company classifies deposits with maturities of more than
               three months and less than one year as short-term bank
               deposits. The short-term bank deposits are presented at their
               cost, including accrued interest.

         f.    Marketable securities:

               The Company accounts for investments in marketable debt
               securities in accordance with Statement Of Opinion No. 44, of
               the Institute of Certified Public Accountants In Israel. The
               Company's marketable securities consist of debt securities and
               are presented at fair value. The change in the fair value of
               marketable securities is included in financial expense
               (income), net.

         g.    Inventories:

               Inventories are stated at the lower of cost or market value.
               Inventory write-offs are provided for slow-moving items or
               technological obsolescence. As of December 31, 2001, the
               Company wrote-off inventories in the amount of $ 129 as part of
               its plan to focus on the network process market. The write-off
               was included in the cost of revenues.

               Cost is determined as follows:

               Raw materials - using the average method.

               Work in progress and finished products - on the basis of
               calculated manufacturing costs.

         h.    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:

                                                                    %
                                                            -------------------
               Office furniture and equipment                       6
               Computers, software and electronic equipment        33
               Motor vehicles                                      15
               Leasehold improvements                          Over the term
                                                               of the lease

               The Company and its subsidiaries assess the recoverability of
               the carrying amount of property and equipment and provide for
               any possible impairment loss based upon the fair value of such
               assets.

               During 2002, 2001 and 2000, the Company recorded impairment
               losses in the amount of $ 0, $ 210 and $ 156, respectively. The
               impairment in 2001 is related to the Company's plan to focus on
               the network processor market and was recorded in statements of
               operations as other operating loss. The impairment in 2000 is
               related to NetGuard's operations and has been included in the
               loss from discontinued operations of a segment of a business in
               the consolidated statements of operations.

         i.    Other assets:

               The technology and the goodwill are being amortized on a
               straight-line basis over their useful life. The technology is
               amortized over five years and the goodwill is amortized over 10
               years.

         j.    Preferred shares in a subsidiary:

               The investment by a third party in the Preferred shares in a
               subsidiary is presented as a quasi equity item. Losses are
               attributed among the different classes of the subsidiary's
               shares according to the ownership level, which determined by
               liquidation preference.

         k.    Gain from issuance of subsidiary's Ordinary shares to a third
               party:

               According to Statement No. 68 of the Institute of Certified
               Public Accountants in Israel, a gain from an issuance of a
               subsidiary's shares in a development stage company to a third
               party is recorded as a deferred gain and amortized according to
               the highest of (i) a three-year period or, (ii) the Company's
               interest in the subsidiary's losses.

         l.    Research and development costs:

               Research and development costs are charged to expenses as
               incurred.

         m.    Severance pay:

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

               The deposited funds may be withdrawn only upon the fulfillment
               of the obligation, pursuant to the severance pay law or labor
               agreements. The value of the deposited funds is based on the
               cash surrendered value of these policies, and includes
               immaterial profits.

               Severance expenses (income) for the years ended December 31,
               2002, 2001 and 2000 were $(25), $ 107 and $ 203, respectively.

         n.    Deferred income taxes:

               The Company follows the liability method of accounting for
               income taxes in accordance with Israeli accounting principles.

               Deferred income taxes are computed in respect of temporary
               differences between the amounts included in these financial
               statements, and those to be considered for tax purposes.

               Deferred tax balances are computed at the tax rate that will be
               in effect when those taxes are released to the statement of
               operations.

               Taxes that would apply in the event of the realization of
               investments in subsidiaries have not been taken into account in
               calculating the deferred taxes, as it is the Company's
               intention to hold these investments.

               As the realization of deferred tax assets in the future is
               uncertain, no deferred taxes were recorded.

         o.    Net earnings (loss) per share:

               Net earnings (loss) per share is computed in accordance with
               Statement 55 of the Institute of Certified Public Accountants
               in Israel, based on the weighted average number of Ordinary
               shares and equivalents outstanding during each period.

               The dilutive effect of options and convertible debentures is
               included in the calculation of basic net earnings per share
               only if their being exercised is considered to be probable,
               based on the ordinary relationship between the market price of
               the shares issuable upon the exercise or conversion of the
               options and convertible debentures, and the discounted present
               value of the future proceeds derived from the exercise of such
               options and convertible debentures.

         p.    Accounting for stock based compensation:

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

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

               Under SFAS No. 123, "Accounting for Stock-Based Compensation",
               pro forma information regarding net income (loss) and net
               earnings (loss) per share is required, and has been determined
               as if the Company had accounted for its employee stock options
               under the fair value method of that Statement. The fair value
               for these options was estimated at the date of grant using the
               Black-Scholes valuation model with the following assumptions:
               risk-free interest rates of 3.00% for 2001, dividend yields of
               0%, expected life for an option of five years and excepted
               volatility of 1.287 for 2001. No options were granted during
               2000 and 2002.

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

               Pro forma information under SFAS 123:

<table>
<caption>

                                                                      Year ended December 31,
                                                       --------------------------------------------------
                                                            2002               2001               2000
                                                       --------------    --------------    --------------


                                                       <c>                  <c>               <c>
Loss from continuing operations as reported               $ (6,728)            $ (443)           $(1,831)
                                                          ========             ======            =======

Income (loss) from discontinued
operations as reported                                    $     51             $  793            $(4,769)
                                                          ========             ======            =======

Net income (loss) as reported                             $ (6,677)            $  350            $(6,600)
                                                          ========             ======            =======

Add: stock-based employee compensation expense
determined under fair value based method                  $   (204)            $ (174)           $  (703)
                                                          ========             ======            =======

Deduct: stock-based employee compensation
expense included in reported net loss                     $   --               $ --              $  --
                                                          ========             ======            =======

Pro forma loss from continuing operations                 $ (6,932)            $ (617)           $(2,534)
                                                          ========             ======            =======

Pro forma income (loss) from discontinued
operations                                                $     51             $  793            $(4,769)
                                                          ========             ======            =======

Pro forma net income (loss)                               $ (6,881)            $  176            $(7,303)
                                                          ========             ======            =======

Pro forma net loss per share from
continuing operations                                     $  (0.89)            $(0.08)           $ (0.37)
                                                          ========             ======            =======

Pro forma net earnings (loss) per share
from discontinued operations                              $   0.01             $ 0.11            $  (0.7)
                                                          ========             ======            =======

Pro forma net earnings (loss) per share                   $  (0.88)            $ 0.03            $ (1.07)
                                                          ========             ======            =======

</table>

         q.    Warranty costs:

               The Company provided a three-year warranty for its discontinued
               LanOptics hardware products - the warranty for the last
               products that were sold will end in December 2004 - and also
               provided a warranty for 14 months for the discontinued NetGuard
               hardware products that ended in April 2002. The warranty was
               provided at no extra charge. A provision was recorded for
               estimated warranty costs based on the Company's experience.
               EZchip has a 90 days limited warranty obligation for its
               products.

         r.    Revenue recognition:

               Revenues from sales of chips for customers that have completed
               their product design phase are recognized upon shipment.

               Revenues from sales of sample chips, evaluation systems and
               software tools are recognized over the customers design period
               - usually 12 months, which is the average time required for
               EZchip customer's to develop networking products, based on
               EZchip technology. In addition, revenues generated for the
               first time for each customer are deferred until a payment is
               accepted.

               Revenues from product sales are recognized in accordance with
               Staff Accounting Bulletin No. 101 ("SAB 101"), when persuasive
               evidence of an agreement exists, delivery of the product has
               occurred, the fee is fixed or determinable and collectibility
               is probable. Generally, the Company does not have any
               significant obligations after delivery. The Company does not
               grant a right of return to its customers.

         s.    Royalty and non-royalty bearing grants:

               Royalty bearing grants from the Government of Israel for
               funding of approved research projects are recognized at the
               time the Company is entitled to such grants on the basis of the
               related costs incurred, and recorded as a deduction of research
               and development costs.

               The Company received royalty-bearing grants from the Government
               of Israel for funding of approved research projects in the
               amount of $ 0, $ 0 and $ 565 during 2002, 2001 and 2000,
               respectively, including amounts related to discontinued
               operations of $ 0, $ 0 and $ 565 during 2002, 2001 and 2000,
               respectively.

               The Company's subsidiary also received non-royalty-bearing
               grants from the Fund for the Encouragement of Marketing
               Activity in the amount of $ 75, $ 25 and $ 0 during 2002, 2001
               and 2000, respectively. These grants are recognized at the time
               the Company is entitled to such grants on the basis of the
               costs incurred and included as a deduction of sales and
               marketing expenses.

         t.    Advertising expenses:

               Advertising expenses are charged to the statement of
               operations, as incurred. Advertising expenses for the years
               ended December 31, 2002, 2001 and 2000 amounted to $ 121, $ 48
               and $ 88, respectively.

         u.    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, short-term bank
               deposits, 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 in the North America, Far East and Israel.
               The Company performs ongoing credit evaluations of its
               customers and to date has not experienced any material losses.
               An allowance for doubtful accounts is determined with respect
               to those amounts that the Company has determined to be doubtful
               of collection.

               The Company's marketable securities include investments in
               debentures 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.

         v.    Fair value of financial instruments:

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

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

               The fair value of marketable securities is based on quoted
               market prices. If the market value is permanently lower than
               the amortized cost then the marketable securities are amortized
               to their market value. As for the fair value of the marketable
               securities see Note 16a6.

         w.    Implementation of new accounting standards and their impact on
               the financial statements

               During October 2001, the Israel Accounting Standards Board
               published Accounting Standard No. 12 with respect to the
               discontinuation of the adjustment of financial statements, and
               Accounting Standard No. 13 with respect to the effect of the
               changes in the exchange rates for foreign currencies. In August
               2002, Accounting Standard No. 14 was published with respect to
               fiscal reporting for interim periods, and in December 2002,
               Accounting Standard No. 17 was published with respect to the
               deferral of the implementation of Accounting Standards No. 12
               and No. 13 until January 1, 2004. In February 2003, Accounting
               Standard No. 15 was published with respect to the impairment of
               assets.

               According to Standards No. 12 and No. 17, which deal with the
               adjustment of financial statements, financial statements will
               discontinue to be adjusted for inflation in Israel commencing
               January 1, 2004. Until December 31, 2003, the Company will
               continue to prepare adjusted financial statements in conformity
               with Opinion No. 36 of the Institute of Certified Public
               Accountants in Israel. The adjusted amounts included in the
               financial statements as of December 31, 2003, will serve as the
               starting point for nominal financial reporting beginning
               January 1, 2004.

               In accordance with the provisions of Accounting Standard No. 13
               and No. 17 prescribe principles with respect to the effect of
               the changes in the exchange rates for foreign currency. These
               Standards replaces clarification No. 8 and clarification No. 9
               to Opinion No. 36 of the Institute of Certified Public
               Accountants in Israel, which are void with the discontinuation
               of the adjustment of financial statements. The Standards deal
               with the translation of transactions in foreign currency and
               the translation of financial statements of foreign operations
               in order to integrate them into the financial statements of the
               reporting company. The translation principles of Accounting
               Standard No. 13 are different from those implemented to date.
               Accounting Standard No. 13 will apply to financial statements
               for periods commencing after December 31, 2003.

               In accordance with the provisions of Accounting Standard No.
               13, it is possible to continue adjusting the financial
               statements pursuant to the changes in the foreign currency
               exchange rates in accordance with section 29(a) to Opinion No.
               36 of the Institute of Certified Public Accountants in Israel
               up until the date on which the Accounting Standards Board will
               publish a new Standard regarding this issue. This Standard
               requires disclosure with respect to the reasons for presenting
               the financial statements in foreign currency. In addition, this
               Standard requires disclosure with respect to any change
               whatsoever in the reporting currency.

               The objective of Accounting Standard No. 14, which deals with
               fiscal reporting for interim periods, is to determine the
               minimum content for financial reporting for interim periods, as
               well as to determine the recognition and measurement principles
               in financial statements for interim periods. In addition, the
               interim financial statements will, for the first time, include
               condensed segmental information similar to the information
               included in the annual financial statements. This Accounting
               Standard, which is based on International Accounting Standard
               No. 34, "Financial Reporting for Interim Periods", replaces
               Opinion No. 43 of the Institute of Certified Public Accountants
               in Israel that deals with financial statements for interim
               periods and Opinion No. 60 that deals with the amendment of
               Opinion No. 43 with respect to the cancellation of the
               obligation to include information regarding nominal data in
               financial statements for interim periods. This Standard will
               apply in respect to financial statements for periods beginning
               on or after January 1, 2003.

               Accounting Standard No. 15, which deals with the impairment of
               assets, is based on International Accounting Standard No. 36,
               and prescribes the accounting principles in the case of a
               decline/elimination of the decline, in the value of a company's
               assets, including investments in investees that are not
               subsidiaries, goodwill arising from the acquisition of
               subsidiaries and fair value adjustments. This Standard will
               apply with respect to financial statements for periods
               commencing on or after January 1, 2003.

               The transitional guidelines in the Standard prescribe that
               losses due to an impairment of assets, which derive from the
               application of this Accounting Standard, will be recognized in
               the pre-tax income. The aforesaid will not apply in the case of
               a loss from the impairment of an asset that was not recognized
               in the past only due to the fact that the total undiscounted
               expected future net cash flow exceeds the book value. The
               latter will be carried to the statement of operations under the
               item "Cumulative effect of the change in the accounting
               principle to the beginning of the year".

               Management does not anticipate that the new Standards, as
               discussed above, will have a significant effect on its results
               of operations, financial position and cash flows.


NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

                                                        December 31,
                                          ------------------------------------
                                                2002                 2001
                                          ----------------     ---------------

             Government authorities           $ 209                $ 55
             Employees                           71                  113
             Prepaid expenses                   198                  109
             Unbilled receivables                25                    -
             Others                              29                   19
                                             ----------            -------
                                              $ 532                $ 296
                                             ==========            =======


NOTE 4:- INVENTORIES

              Raw material                    $  94                $   -
              Work in progress                    3                    -
              Finished products                 280                    -
                                            ----------             ------
                                              $ 377                $   -
                                            ==========             ======


NOTE 5:- PREPAID DEVELOPMENT AND PRODUCTION COSTS

               During 2000, the Company recorded prepaid development and
               production costs in the amount of $ 2,134 pursuant to an
               agreement signed between EZchip and IBM. According to the
               agreement, EZchip issued to IBM fully vested non-forfeitable
               Ordinary shares and is also obligated to 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: Development - Access to unique semiconductor
               communications cores and technologies, such as Cu-11,
               Production - IBM will develop specialized high-performance
               embedded DRAM cores, which meet the rigorous 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,
               Good 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") (See Note 1d).

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

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

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

               For the year ended December 31, 2002, 2001 and 2000,
               amortization expenses related to the development costs amounted
               to $542, $542 and $267, respectively and the amortization
               expenses related to the production cost amounted to $6, $0
               and $0, respectively.

               At each balance sheet date, the unamortized capitalized
               development and production costs are compared to the net
               realizable value of the prepaid development and production
               costs. The amount by which the unamortized capitalized costs
               exceed the net realizable value of that asset is written-off.
               The net realizable value is the estimated future gross income
               from that product reduced by the estimated future costs of
               completing and selling that product. As of December 31, 2002,
               no write off was deemed necessary.


NOTE 6:- PROPERTY AND EQUIPMENT, NET

<table>
<caption>

                                                                                    December 31,
                                                                        -------------------------------------
                                                                             2002                 2001
                                                                        ----------------     ----------------
             Cost:

                                                                        <c>                   <c>
                Office furniture and equipment                             $        7            $      7
                Computers, software and electronic equipment                    2,724                2,324
                Motor vehicles                                                     82                   82
                Leasehold improvements                                             42                    7
                                                                        ----------------     ----------------

                                                                                2,855                2,420
                                                                        ----------------     ----------------

             Accumulated depreciation                                           1,834                1,139
                                                                        ----------------     ----------------

             Depreciated cost                                              $    1,021            $   1,281
                                                                        ================     ================

</table>

            Depreciation expenses for the years ended December 31, 2002,
            2001 and 2000 amounted to approximately $695, $536 and $638,
            respectively.


NOTE 7:- OTHER ASSETS

<table>
<caption>

                                                                                                December 31,
                                                                                    -------------------------------------
                                                                                         2002                 2001
                                                                                    ----------------     ----------------
             Cost:

                                                                                 <c>                      <c>
             Technology                                                             $       1,425            $       -
             Goodwill                                                                       1,634                    -
                                                                                    ----------------     ----------------

                                                                                            3,059                    -
             Accumulated depreciation                                                         167                    -
                                                                                    ----------------     ----------------

             Depreciated cost                                                       $       2,892            $       -
                                                                                    ================     ================

</table>

             Depreciation expenses for the years ended December 31, 2002,
             2001 and 2000 amounted to approximately $167, $0 and $0,
             respectively.


NOTE 8:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<table>
<caption>

                                                                                                December 31,
                                                                                    -------------------------------------
                                                                                         2002                 2001
                                                                                    ----------------     ----------------


                                                                                 <c>                      <c>
             Employees and payroll accruals                                         $       1,060            $     837
             Accrued expenses                                                                 766                  583
             Deferred revenues                                                                468                    -
             Others                                                                             2                    -
                                                                                    ----------------     ----------------

                                                                                    $       2,296            $   1,420
                                                                                    ================     ================
</table>


NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES

         a.    Royalty commitments:

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

               The Company is committed to pay royalties to the Chief
               Scientist with respect to products in which the Chief Scientist
               participates in their research and development costs. The
               royalties are paid at the rate of 3%-4.5% of the sale of
               products resulting from research and development projects, up
               to an amount equal to 100%-150% of the grants received, linked
               to the exchange rate of the U.S. dollar and bearing interest at
               LIBOR from January 1, 1999. Repayment of such grants is not
               required in the event that there are no sales of products
               developed through such grants. As of December 31, 2002, the
               Company has a contingent obligation to pay royalties with
               respect to the aforementioned grants in the amount of $ 7,802,
               which is related to discontinued operations. Therefore, the
               Company does not anticipate that it will pay additional
               royalties in respect of these grants.

               Royalties paid or accrued during 2002, 2001 and 2000 were $0,
               $63 and $254, respectively, and recorded as part of the cost
               of revenues.

         b.    Lease commitments:

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

                                                 Year ended
                                                December 31,
                                             -------------------

                             2003                $   339
                             2004                    339
                             2005                    339
                             2006                    339
                             2007                     28
                                             --------------
                                                 $ 1,384
                                             ==============

                      In case the Company will decide to terminate the
                      operating lease agreement earlier, the Company will pay
                      compensation in an amount of $20 to $80.

                      Rent expenses for the years ended December 31, 2002,
                      2001 and 2000 amounted to $410, $383 and $482,
                      respectively.

               (2)    The Company and its subsidiary also lease their motor
                      vehicles under operating lease agreements, which will
                      expire in 2005. The minimum lease payments under
                      non-cancelable operating leases are as follows:

                                                 Year ended
                                                December 31,
                                             -------------------

                             2003                $   340
                             2004                    125
                             2005                      8
                                             -------------------
                                                 $   473
                                             ===================

                      Rent expenses for the years ended December 31, 2002,
                      2001 and 2000 amounted to $549, $414 and $44,
                      respectively.


NOTE 10:- SHAREHOLDERS' EQUITY

         a.    1.     Company's shares:

                      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.     Subsidiary's shares:

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

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

                      b)    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.

                      c)    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.

                      d)    Dividend preference:

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

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

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

                      e)    Anti-dilution:

                            In the event that at any time after the original
                            issuance date of Preferred A and B 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 shares, then the
                            conversion price for each Preferred share shall be
                            adjusted to reflect such price reduction.

                      f)    Liquidation preference:

                            The holders of Series B Preferred shares shall be
                            entitled prior to and in preference to any payment
                            to any of the holders of any other classes of
                            shares an amount per each Preferred share equal to
                            the higher of (i) two and a half times the
                            purchase price plus all accumulated but unpaid
                            dividends or (ii) the amount that the holder would
                            receive on an as if converted basis.

                            Upon the completion of the distribution to the
                            holders of Series B Preferred shares the holders
                            of the Preferred A shares shall be entitled to
                            receive, prior to and in preference to any
                            payments to any of the holders of any other
                            classes of shares, an amount per each Preferred
                            share equal to the purchase price plus accumulated
                            but unpaid dividends.

         b.    As part of the listing on the TASE, the Company retired all of
               its Deferred shares (1,000) at their nominal value that is
               lower than $1.

         c.    On August 19, 2002, the Company issued 1,153,508 Ordinary
               shares in consideration for 2,777,778 Preferred A shares and
               737,462 Preferred B shares of EZchip (see Note 1d).

         d.    Stock option plans:

               Since 1993, under the 1992 option plan, the Company has granted
               options to purchase Ordinary shares to key employees, directors
               and consultants of the Company. Under the terms of these plans,
               options, generally become exercisable ratably over a four-year
               period commencing with the date of grant. The options generally
               expire no later than six years from the date of the grant, and
               are non-transferable, except under the laws of succession.

               Pursuant to the plans, the Company reserved for issuance
               750,000 Ordinary shares. As of December 31, 2002, an aggregate
               of 140,111 Ordinary shares of the Company are still available
               for future grant.

               The exercise price of the options granted under the plans may
               not be less than the nominal value of the shares into which
               such options are exercised. Any options, which are forfeited or
               canceled before expiration, become available for future grants.

               The following table is a summary of activity for the Company's
               stock options plans:

<table>
<caption>

                                                       Year ended December 31,
                          ----------------------------------------------------------------------------------
                                     2002                       2001                        2000
                          --------------------------- --------------------------  --------------------------
                                          Weighted                   Weighted                    Weighted
                                          average                     average                     average
                             Number       exercise       Number      exercise       Number       exercise
                           of options      price       of options      price      of options       price
                          ------------- ------------- ------------- ------------  ------------  ------------


                       <c>              <c>           <c>            <c>           <c>         <c>
Outstanding at
beginning of year         294,989          $   3.92      313,614        $   3.95      437,864     $   3.61

  Granted                     -              -            20,000        $   4.15          -       $     -
  Exercised               (21,250)         $   2.5        (6,125)       $   2.50      (92,125)    $   4.37
  Forfeited               (15,000)         $   4.25      (32,500)       $   4.65      (32,125)    $   3.43
                         ---------                      ---------                    ---------

 Outstanding at
   end of year            258,739          $   4.01      294,989        $   3.92      313,614      $   3.95
                         ========          ========     ========        ========     ========      =========

Exercisable
options at end of
year                      247,239          $   4         231,660        $   3.87      129,663      $   3.61
                         ========          ========     ========        ========     ========      =========

</table>

The options outstanding as of December 31, 2002, have been separated into
exercise prices, as follows:

<table>
<caption>

                                                                                                               Weighted
                                          Options            Weighted                          Options         average
                                         outstanding         average         Weighted        exercisable       exercise
                                            as of           remaining         average           as of          price of
                     Exercise            December 31,      contractual       exercise        December 31,      options
                     price                   2002             life             price             2002         exercisable
                     ------------------------------------------------------------------------------------------------------
                                                              Years
                                                          -------------


                  <c>                       <c>            <c>          <c>                      <c>        <c>
                     $    2.5                  38,000         1.26         $ 2.5                    38,000     $ 2.5
                     $    4.15                 20,000         3.87         $ 4.15                   10,000     $ 4.15
                     $    4.234               194,739         0.29         $ 4.234                 194,739     $ 4.234
                     $    6                     6,000         1.99         $ 6                       4,500     $ 6
                                       -----------------                                    ----------------
                                              258,739                      $ 4.01                  247,239     $ 4.0
                                       =================                   ==============   ================   ============
</table>


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

<table>
<caption>

                                                   For exercise prices on the date of grant that
                                       ---------------------------------------------------------------------
                                              Equal market price                 Exceed market price
                                       ---------------------------------- ----------------------------------
                                                 December 31,                       December 31,
                                       ---------------------------------- ----------------------------------
                                         2002        2001        2000        2002       2001        2000
                                       ----------  ----------  ---------- ----------- ----------  ----------


                                      <c>         <c>         <c>        <c>         <c>         <c>
       Weighted average exercise
          price                          $     -     $     4.15  $     -    $      -    $     -     $     -

       Weighted average fair value
          on date of grant               $     -     $     3.62  $     -   -$      -    $     -   - $     -

</table>

               Stock options of subsidiary:

               Under the EZchip's Stock Option Plans (the Israeli and the U.S.
               stock option plans (the "2000 section 102 Option Plan" and the
               "2001 U.S. Stock Option Plan") - ("the plans")), options for
               Ordinary shares may be granted to officers, directors,
               employees and consultants of EZchip.

               Pursuant to the plans, EZchip reserved for issuance 7,250,000
               Ordinary shares. As of December 31, 2002, an aggregate of
               1,759,976 Ordinary shares of EZchip are still available for
               future grant.

               The options generally expire during the period of seven to10
               years from the date of grant. The exercise price of the options
               granted under the plan may not be less than the nominal value
               of the shares into which such options are exercised. The
               options vest primarily over four years. Any options that are
               canceled or forfeited before expiration become available for
               future grant.

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

<table>
<caption>

                                                     Year ended December 31,
                        ----------------------------------------------------------------------------------
                                   2002                       2001                        2000
                        --------------------------- --------------------------  --------------------------
                                        Weighted                   Weighted                    Weighted
                                        average                     average                     average
                           Number       exercise       Number      exercise       Number       exercise
                         of options      price       of options      price      of options       price
                        ------------- ------------- ------------- ------------  ------------  ------------


                       <c>           <c>           <c>         <c>            <c>             <c>
     Outstanding at
      beginning of
      year                5,492,211     $      0.65   3,516,500   $ 0.45                  -     $      -

      Granted                90,000     $      1.0    2,078,711   $ 1.00          3,531,500     $      0.45
      Forfeited            (107,187)    $      0.79    (103,000)  $ 0.61            (15,000)    $      0.61
                        -------------               -------------               ------------

     Outstanding at
      end of year         5,475,024     $      0.66   5,492,211   $ 0.65          3,516,500     $      0.45
                        ============= ============= ============= ============  ============    ============

     Exercisable
      options at end
      of year             3,236,149     $      0.53   1,654,375   $ 0.40                  -     $      -
                        ============= ============= ============= ============  ============  ============

</table>

               The options outstanding as of December 31, 2002, have been
               separated into exercise prices as follows:

<table>
<caption>

                                                                                                               Weighted
                                         Options           Weighted                           Options           average
                                       outstanding          average         Weighted        exercisable        exercise
                                          as of            remaining        average            as of           price of
                     Exercise          December 31,       contractual       exercise        December 31,        options
                     price                 2002              life            price              2002          exercisable
                     -----------------------------------------------------------------------------------------------------
                                                             Years
                                                         --------------


                  <c>               <c>                 <c>              <c>             <c>                 <c>
                     $    0.40         2,931,875           4.34             $       0.4     2,400,938           $       0.4
                     $    0.72           429,438           4.41             $       0.72      268,156           $       0.72
                     $    1.00         2,113,711           6.36             $       1.0       567,055           $       1.0
                                     -------------                                        -------------

                                       5,475,024           5.13             $       0.66    3,236,149           $       0.53
                                     =============                        =============   ==============        ============

</table>

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

<table>
<caption>

                                                      For exercise prices on the date of grant that
                                          ---------------------------------------------------------------------
                                                 Equal market price                 Exceed market price
                                          ---------------------------------- ----------------------------------
                                                    December 31,                       December 31,
                                          ---------------------------------- ----------------------------------
                                            2002        2001        2000        2002       2001        2000
                                          ----------  ----------  ---------- ----------- ----------  ----------


                                         <c>         <c>         <c>        <c>         <c>         <c>
         Weighted average exercise
         price                              $     1.00  $     1.00  $     0.45 $      -    $     -     $  0.64

         Weighted average fair value on
            date of grant                   $     0.41  $     0.45  $     0.21 $      -    $     -     $  0.53

</table>

               The subsidiary's outstanding options to consultants as of
               December 31, 2002, are as follows:

<table>
<caption>

                                       Options for        Exercise price       Options        Exercisable
                     Issuance date   Ordinary shares        per share        exercisable        through
                     --------------- -----------------   -----------------  --------------  -----------------


                      <c>                  <c>                  <c>        <c>                   <c>
                     May 2000                 15,000               $   0.72   15,000            May 2007

</table>

         f.    Warrants:

               Pursuant to an investment agreement, signed on May 16, 1999,
               the Company granted to a group of investors warrants to acquire
               725,000 Ordinary shares during the two years following the date
               of the agreement at a price of $ 5 per share. These warrants
               were exercisable at any time. During 2000, 675,000 warrants
               were exercised into 558,192 Ordinary shares in a cashless
               exercise, and an additional 50,000 warrants were exercised to
               50,000 Ordinary shares for an amount of $ 254.

         g.    Repurchase of Ordinary shares:

               The Company has received all necessary approvals in Israel to
               allow the repurchase of up to 10% of its outstanding shares (up
               to approximately 600,000 shares) in the open market, from time
               to time, at prevailing prices. The Company did not purchase its
               own shares during the reporting periods.

         h.    Dividends:

               Dividends, when declared, will be paid in NIS. Dividends paid
               to shareholders outside Israel will be converted into dollars,
               on the basis of the exchange rate prevailing at the date of
               payment. The Company has determined that it will not distribute
               dividends out of tax-exempt profits (see Note 11b).


NOTE 11:- INCOME TAXES

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

               Results of the Company and its Israeli subsidiaries for tax
               purposes are measured in terms of earnings in NIS after certain
               adjustments for changes in the Israeli Consumer Price Index
               ("CPI").

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

               EZchip Ltd. has been granted an "Approved Enterprise" status
               under the above Law and has elected to enjoy the "alternative
               benefits track" - waiver of grants in return for a tax
               exemption and, accordingly, EZchip's income from the "Approved
               Enterprise" will be tax-exempt for a period of 10 years
               commencing with the year in which it first earns taxable
               income.

               The period of tax benefits is limited to the earlier of 12
               years from commencement of production, or 14 years from the
               date of approval. The period of benefits related to the granted
               "Approved Enterprise" expires in 2013.

               If the tax-exempt income attributable to the Approved
               Enterprise is distributed in a manner other than in the
               complete liquidation of EZchip, it would be taxed at the
               corporate tax rate applicable to such profits as if EZchip had
               not chosen the alternative track of benefits (currently - 25%).
               EZchip has decided not to declare dividends out of such
               tax-exempt future income in the future. Accordingly, no
               deferred income taxes have been provided on income attributable
               to EZchip's "Approved Enterprise".

               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
               the balance sheet date, EZchip's benefit period has not yet
               commenced.

               As of December 31, 2002, EZchip complies with the conditions
               set forth by the Investment Center.

               Income not eligible for the "Approved Enterprise" benefits
               mentioned above is taxed at the regular rate of 36%.

         c.    Available carryforward tax losses:

               The Company and its subsidiaries have accumulated losses and
               deductions for tax purposes as of December 31, 2002 in the
               amount of $ 38,622 as follows: $ 37,255 in Israel and $ 1,367
               in the U.S.

               Carryforward tax losses in Israel are linked to the Israeli
               CPI, and can be carried forward and offset against taxable
               income in the future for an indefinite period.

               Carryforward tax losses in the U.S. for federal income tax can
               be carried forward and offset against taxable income in the
               future for a period of 19 to 20 years.

         d.    Loss from continuing operations, before minority interest:

<table>
<caption>

                                                   Year ended December 31,
                                      ---------------------------------------------------
                                           2002              2001              2000
                                      ---------------    --------------    --------------


                                   <c>                <c>               <c>
                    Domestic          $ (14,098)         $ (7,731)         $ (3,353)
                    Foreign              (1,118)              206              (845)
                                      ---------------    --------------    --------------

                                      $ (15,216)         $ (7,525)         $ (4,198)
                                      ===============    ==============    ==============

</table>


         e.    As the realization of deferred tax assets in the future is
               uncertain, no deferred taxes were provided.


NOTE 12:- 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 end customers.

               The following presents total revenues for the years ended
               December 31, 2002, 2001 and 2000 and long-lived assets, as of
               December 31, 2002, 2001 and 2000:

<table>
<caption>

                                                     2002                         2001                         2000
                                           --------------------------  ---------------------------  ---------------------------
                                              Total      Long-lived       Total      Long-lived        Total        Long-lived
                                            revenues       assets       revenues       assets         revenues        assets
                                           ------------  ------------  ------------  ------------   -------------  -------------


                                        <c>            <c>           <c>           <c>             <c>           <c>
                    Israel                 $  185         $ 4,680       $  -          $ 2,597         $   -         $ 2,576
                    Far East                  275              -           -               -              -               -
                    North America               5              10          -                9             -               -
                                           -------  ------------  ------------  ------------   -------------  -------------

                                           $  465         $ 4,690       $  -          $ 2,606         $   -         $ 2,576
                                           ============  ============  ============  ============   =============  =============
</table>


NOTE 13:- SELECTED STATEMENTS OF OPERATIONS DATA

         a.    Financial income:

<table>
<caption>

                                                                                       Year ended December 31,
                                                                          ---------------------------------------------------
                                                                               2002              2001              2000
                                                                          ---------------   ---------------   ---------------


                                                                            <c>               <c>               <c>
                      Income:
                      Interest on short-term bank deposits and gains
                        on marketable securities                               $ 587             $ 1,344           $ 818
                      Gains arising from foreign currency translation
                        adjustments                                               76                  99               9
                                                                          ---------------   ---------------   ---------------

                                                                                 663               1,443             827
                                                                          ---------------   ---------------   ---------------
                      Expenses:
                      Interest, bank charges and losses on marketable
                        securities                                                 4                  13              40
                      Losses arising from foreign currency
                        translation adjustments                                    -                   3              61
                                                                          ---------------   ---------------   ---------------

                                                                                   4                  16             101
                                                                          ---------------   ---------------   ---------------
                                                                               $ 659             $ 1,427           $ 726
                                                                          ===============   ===============   ===============

         b.    Other income:

                     Amortization of deferred gain from
                     issuance of subsidiary's Ordinary shares
                     to a third party                                          $   -             $   799           $ 1,138
                     Write-off of investment in an affiliate                       -                  -               (673)
                     Other                                                         -                  15                 -
                                                                         ---------------   ---------------   ---------------
                                                                               $   -             $   814           $   465
                                                                         ===============   ===============   ===============


NOTE 14:- TRANSACTIONS WITH RELATED PARTIES

              Legal expenses:
                 Professional fees to an entity controlled by a
                   shareholder                                                 $  79             $    59           $   120
                                                                         ================  ================  ================
</table>


NOTE 15:- SUBSIDIARIES

<table>
<caption>

                                                                                      Percentage of
                                                                                      ownership and        Jurisdiction of
                                                                                         control            incorporation
                                                                                    ------------------    ------------------
                                                                                            %
                                                                                    ------------------


                                                                                        <c>                 <c>
              LanOptics Inc. - inactive as of February 2002                                100                 U.S.A.
              LanOptics Plc. - inactive as of June 2000                                    100                  U.K.
              NetGuard Ltd. - inactive as of February 2001                                92.5                 Israel
              NetGuard Inc.(1) - inactive as of November 2000                              100                 U.S.A.
              NetGuard Plc. (1) - inactive as of February 2001                             100                  U.K.
              NetExchange Ltd. - inactive as of December 1998                               90                 Israel
              NetExchange Inc. (2) - inactive as of September 1998                         100                 U.S.A.
              EZchip Ltd. (3)                                                               66                 Israel
              EZchip Inc. (4)                                                              100                 U.S.A.

               (1)    Represents the percentage of holdings for NetGuard Ltd.

               (2)    Represents the percentage of holdings for NetExchange
                      Ltd.

               (3)    Represents the percentage of holdings in all classes of
                      shares.

               (4)    Represents the percentage of holdings for EZchip Ltd.
</table>


NOTE 16:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP ON
          THE CONSOLIDATED FINANCIAL STATEMENTS

         a.    The consolidated financial statements of LanOptics conform with
               accounting principles generally accepted in Israel (Israeli
               GAAP) which differ in certain respects from those followed in
               the U.S., as described below:

               1.     Deferred income taxes:

                      Under U.S. GAAP, paragraph 9(f) of SFAS No. 109,
                      "Accounting for Income Taxes", creates an exception
                      which prohibits the recognition of deferred tax
                      liabilities or assets that arise from differences
                      between the financial reporting and tax bases of assets
                      and liabilities that are remeasured from the local
                      currency into U.S. dollars using historical exchange
                      rates and that result from (i) changes in exchange rate
                      or (ii) indexing for tax purposes.

                      Under Israeli GAAP, companies reporting in or linked to
                      the U.S. dollar provide deferred income taxes on
                      differences between the financial reporting and tax
                      bases of assets and liabilities.

                      Under U.S. GAAP, deferred taxes are provided on
                      undistributed tax exempt profits of domestic
                      subsidiaries in Israel.

                      Under Israeli GAAP, income taxes are not provided on the
                      undistributed tax exempt profits of an "approved
                      enterprise", where such profits have been reinvested and
                      will not be distributed to the Company's shareholders.

                      Under U.S. GAAP, deferred income taxes should be
                      provided for the gain resulting from the issuance of
                      shares in subsidiary to a third party.

                      Under Israeli GAAP, deferred income taxes should not be
                      provided for gain resulting from the issuance of shares
                      in subsidiary to a third party.

                      Under U.S. GAAP, deferred income taxes should be
                      provided for the realization of investment in
                      subsidiaries that management intends to retain.

                      Under Israeli GAAP, deferred income taxes should not be
                      provided for the realization of investments in
                      subsidiaries that management intends to retain.

                      Deferred tax assets consist of the following:

<table>
<caption>

                                                                                               December 31,
                                                                             -------------------------------------
                                                                                   2002                2001
                                                                             -----------------    ----------------


                                                                             <c>                  <c>
                      Accrued vacation pay and severance pay                    $      269           $      238
                      Loss carryforward                                             13,904               11,059
                                                                             -----------------    ----------------

                      Deferred tax assets before valuation
                      allowance                                                     14,173               11,297
                      Less - valuation allowance                                   (14,173)             (11,297)
                                                                             -----------------    ----------------
                      Net deferred tax assets                                   $        -           $       -
                                                                             =================    ================
</table>

                      During the year ended December 31, 2002, the Company and
                      its subsidiaries in Israel and in the U.S. have provided
                      valuation allowances of $ 2,876 and increased the
                      valuation allowance to $ 14,173 in respect of deferred
                      tax assets resulting from tax loss carryforward and
                      other temporary differences. Management currently
                      believes that it is more likely than not that the
                      deferred tax assets regarding the loss carryforward and
                      other temporary differences will not be realized in the
                      foreseeable future.

               2.     Gain from issuance of the subsidiary's Ordinary shares
                      to a third party:

                      Under Israeli GAAP, the gain from the issuance of a
                      development stage subsidiary's Ordinary shares to third
                      party, was recorded as a deferred gain from issuance of
                      a subsidiary's Ordinary shares and amortized according
                      to the higher of (i) amortization over a three-year
                      period (ii) the Company's interest in the subsidiary's
                      losses.

                      For the years ended December 31, 2001 and 2000 the
                      amortization of the deferred gain amounted to $ 799 and
                      $ 1,138, respectively. As of December 31, 2001, the
                      deferred gain was completely amortized.

                      Under U.S. GAAP, the gain from the issuance of a
                      development stage subsidiary's Ordinary shares to a
                      third party, is accounted for as an equity transaction
                      in consolidation.

               3.     Preferred shares of a subsidiary:

                      Under Israeli GAAP, a subsidiary's losses are attributed
                      to the different classes of the subsidiary's shares
                      according to the ownership level, which is determined by
                      liquidation preference.

                      For the years ended December 31, 2002, 2001 and 2000,
                      amounts of $ 8,488, $ 7,002 and $ 2,882, respectively,
                      were attributed to the holders of Preferred shares of
                      the subsidiary and was recorded as a minority interest
                      in earnings or losses of a subsidiary.

                      Under U.S. GAAP, the issuance of subsidiary's Preferred
                      shares to a third party, should be accounted for as a
                      separate component of minority interest, Preferred
                      shares of subsidiary, that does not participate in the
                      losses of the subsidiary.

               4.     Earning (loss) per share:

                      According to Israeli GAAP (Opinion No. 55), the dilutive
                      effect of options is included in the calculation of
                      basic earning (loss) per share if their exercise is
                      considered to be probable, based on the relationship
                      between the market price of the shares issuable upon the
                      exercise of the options and the discounted present value
                      of the future proceeds derived from the exercise of such
                      options.

                      According to U.S. GAAP, basic net earnings (loss) per
                      share are computed based on the weighted average number
                      of Ordinary shares outstanding during each year. Diluted
                      net earnings 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, 2002, 2001 and 2000,
                      all outstanding stock options and warrants have been
                      excluded from the calculation of the diluted net loss
                      per Ordinary share because all such stock options were
                      antidilutive. The total weighted average number of
                      Ordinary shares related to options and warrants excluded
                      from the calculation of diluted net loss per share were
                      258,739, 294,989 and 313,614 for the years ended
                      December 31, 2002, 2001 and 2000, respectively.

               5.     Functional currency:

                      According to Israeli GAAP, the Company adjusts its
                      financial statements according to the changes in the
                      exchange rate of the U.S. dollar in conformity with
                      section 29b to Statement 36 of the Institute of
                      Certified Public Accountants in Israel.

                      According to U.S. GAAP, monetary accounts maintained in
                      currencies other than the dollar are remeasured into
                      U.S. dollars in accordance with Statement of Financial
                      Accounting Standard No. 52 "Foreign Currency
                      Translation". All transactions gains and losses of the
                      remeasurement of monetary balance sheet items are
                      reflected in the statements of operations as financial
                      income or expenses, as appropriate.

                      A majority of the Company's sales is made outside
                      Israel, mainly in U.S. dollars. In addition, a
                      substantial portion of the Company's costs is incurred
                      in dollars. The Company's management believes that the
                      dollar is the primary currency of the economic
                      environment in which the Company and its subsidiaries
                      operate. Thus, the functional and reporting currency of
                      the Company and its subsidiaries is the dollar.

                      Accordingly, there is no material difference between
                      Israeli and U.S. GAAP.

               6.     Marketable securities:

                      Marketable securities designated for sale in the
                      short-term are carried at fair-value, in accordance with
                      Statement of Opinion No. 44, of the Institute of
                      Certified Public Accountants In Israel.

                      According to U.S. GAAP, 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 2002 and 2001, all
                      marketable securities were designated as
                      available-for-sale. Available-for-sale securities are
                      carried at fair value, with the unrealized gains and
                      losses, reported as a separate component of
                      shareholders' equity, accumulated other comprehensive
                      income (loss). Realized gains and losses on sales of
                      investments, as determined on a specific identification
                      basis, are included in the consolidated statements of
                      operations.

                      The gross realized gains on sale of available-for-sale
                      securities totaled $566, $1,189 and $599 in 2002, 2001
                      and 2000, respectively.

                      As of December 31, 2002, 2001 and 2000, the unrealized
                      gain amounted to $21, $119 and $17, respectively.

                      The amortized cost and estimated fair value of debt and
                      marketable equity securities as at December 31, 2002 and
                      2001 by contractual maturity are shown below:

<table>
<caption>

                                                    2002                                         2001
                                 -------------------------------------------- --------------------------------------------
                                              Gross      Gross                             Gross      Gross
                                 Amortized  unrealized unrealized   Market    Amortized  unrealized unrealized   Market
                                   cost       gains      losses     value       cost       gains      losses     value
                                 ---------- ---------- ---------------------- ---------- ---------- ----------------------


                              <c>          <c>         <c>       <c>       <c>          <c>        <c>       <c>
              Available-for-sale:
              U.S. and European
              corporate debts
              securities         $ 6,623      $ 21        $ -       $ 6,644   $  17,554    $ 119      $  -      $  17,673
                                 ========== ========== ====================== ========== ========== ==========  ==========

                                                                                                      2002
                                                                                     --------------------------------------
                                                                                        Amortized              Market
                                                                                          cost                  value
                                                                                     -----------------    -----------------
                       Available-for-sale:
                       Matures in one year                                           $      6,134          $    6,153
                       Matures after one year through three years                             489                 491
                                                                                     -----------------    -----------------
                       Total                                                         $      6,623          $    6,644
                                                                                     =================    =================
</table>


               7.     Comprehensive income (loss):

                      Under Israeli GAAP, gross unrealized gains are recorded
                      in the Company's statements of operations.

                      Under Statement of Financial Accounting Standard No.
                      130, "Reporting Comprehensive Income" ("SFAS No. 130"),
                      the Company should include and display specific income
                      component as part of the shareholders equity.

                      As of December 31, 2002, 2001 and 2000, net unrealized
                      gains on available-for-sale marketable securities
                      amounted to $21, $119 and $17, respectively.

               8.     Cumulative dividends on Preferred shares:

                      Under Israeli GAAP, cumulative dividends on Preferred
                      shares do not affect the basic and diluted net earnings
                      (loss) per share.

                      Under U.S. GAAP, cumulative dividends on Preferred
                      shares reduce earnings available to Ordinary
                      shareholders, even if they are not declared. This
                      reduction of earnings affects the basic and diluted net
                      earnings (loss) per share.

                      There was no material difference between Israeli and
                      U.S. GAAP for all periods presented.

               9.     Recently issued accounting pronouncements in the U.S.:

                      In June 2002, the FASB issues Statement of Financial
                      Accounting Standard No. 146, "Accounting for Costs
                      Associated with Exit or Disposal Activities" ("SFAS No.
                      146"), which addresses significant issue regarding the
                      recognition, measurement, and reporting of costs
                      associated with exit and disposal activities, including
                      restructuring activities. SFAS No. 146 requires that
                      costs associated with exit or disposal activities be
                      recognized when they are incurred rather than at the
                      date of a commitment to an exit or disposal plan. SFAS
                      No. 146 is effective for all exit or disposal activities
                      initiated after December 31, 2002. The Company does not
                      expect the adoption of SFAS No. 146 to have a material
                      impact on its results of operations or financial
                      position.

                      In November 2002, the FASB issued FASB Interpretation
                      No. 45, "Guarantor's Accounting and Disclosure
                      Requirements for Guarantees, Including Indirect
                      Guarantees of Indebtedness of Others, an Interpretation
                      of FASB Statements No. 5, 57, and 107 and Rescission of
                      FASB Interpretation No. 34" ("FIN No. 45"). FIN No. 45
                      elaborates on the disclosures to be made by a guarantor
                      in its interim and annual financial statements about its
                      obligations under certain guarantees that it has issued.
                      It also clarifies that a guarantor is required to
                      recognize, at the inception of a guarantee, a liability
                      for the fair value of the obligation undertaken in
                      issuing the guarantee. FIN No. 45 does not prescribe a
                      specific approach for subsequently measuring the
                      guarantor's recognized liability over the term of the
                      related guarantee. It also incorporates, without change,
                      the guidance in FASB Interpretation No. 34, "Disclosure
                      of Indirect Guarantees of Indebtedness of Others," which
                      is being superseded. The disclosure provisions of FIN
                      No. 45 are effective for financial statements of interim
                      or annual periods that end after December 15, 2002, and
                      the provisions for initial recognition and measurement
                      are effective on a prospective basis for guarantees that
                      are issued or modified after December 31, 2002,
                      irrespective of a guarantor's year-end. The Company does
                      not expect the adoption of FIN No. 45 to have a material
                      impact on its results of operations or financial
                      position.

                      In November 2002, the EITF reached a consensus on Issue
                      00-21, addressing how to account for arrangements that
                      involve the delivery or performance of multiple
                      products, services, and/or rights to use assets. Revenue
                      arrangements with multiple deliverables are divided into
                      separate units of accounting if the deliverables in the
                      arrangement meet the following criteria: (1) the
                      delivered item has value to the customer on a standalone
                      basis; (2) there is objective and reliable evidence of
                      the fair value of undelivered items; and (3) delivery of
                      any undelivered item is probable. Arrangement
                      consideration should be allocated among the separate
                      units of accounting based on their relative fair values,
                      with the amount allocated to the delivered item being
                      limited to the amount that is not contingent on the
                      delivery of additional items or meeting other specified
                      performance conditions. The final consensus will be
                      applicable to agreements entered into in fiscal periods
                      beginning after June 15, 2003 with early adoption
                      permitted. The provisions of this Consensus will have no
                      significant effect on the Company's revenue recognition
                      policy.

               10.    Goodwill:

                      In accordance with Israeli GAAP, goodwill is amortized
                      periodically to the statements of operations.

                      In accordance with the U.S. GAAP, as prescribed by SFAS
                      No. 142 "Goodwill and Other Intangible Assets", goodwill
                      arising from acquisitions would not be amortized. The
                      Company is required to perform an annual impairment
                      review of goodwill impairment. The Company will also
                      assess the impairment of goodwill whenever events or
                      changes in circumstances indicates that the carrying
                      value may not be recoverable.

         b.    The effect of the material differences between Israeli and U.S.
               GAAP of the aforementioned items on the financial statements is
               as follows:

               1.     On statement of operations items:

<table>
<caption>

                                                               Year ended December 31,
                                                    ---------------------------------------------
                                                         2002           2001            2000
                                                    ------------  --------------  --------------


                                                <c>              <c>             <c>
Net income (loss) according to Israeli GAAP        $    (6,677)     $       350     $    (6,600)

Gain from issuance of subsidiary's Ordinary
  shares to third party                                    -               (799)         (1,138)
Minority interest in losses of subsidiary -
  Preferred shares                                      (8,488)          (7,002)         (2,882)
Amortization of goodwill                                    60              -               -
Unrealized gains on marketable securities                  (21)            (119)            (17)
                                                   -----------      -----------     -----------

Net loss according to U.S. GAAP                    $   (15,126)     $    (7,570)    $   (10,637)
                                                   ===========      ===========     ===========

Net earnings (loss) per share as reported
according to Israeli GAAP(basic and
diluted)                                           $     (0.86)     $      0.05     $     (0.97)
                                                   ===========      ===========     ===========

Net loss per share according to U.S. GAAP          $     (1.95)     $     (1.04)    $     (1.56)
                                                   ===========      ===========     ===========

Net loss per share from continuing operations
according to U.S. GAAP (basic)                     $     (1.95)     $     (1.15)    $     (0.86)
                                                   ===========      ===========     ===========

Net earnings (loss) per share from
discontinued operations according to
U.S. GAAP (basic)                                        $ -        $      0.11     $     (0.70)
                                                   ===========      ===========     ===========

Weighted average number of Ordinary shares
used  in computing net losses per share
under U.S. GAAP (basic)                              7,744,593        7,287,715       6,804,043
                                                   ===========      ===========     ===========
</table>


               2.     On balance sheet items:

<table>
<caption>

                                            December 31, 2002                        December 31, 2001
                                  ---------------------------------------  ---------------------------------------
                                  As per                        As per     As per                        As per
                                  Israeli                        U.S.       Israeli                       U.S.
                                     GAAP      Adjustment        GAAP         GAAP      Adjustment        GAAP
                                  ----------- --------------  -----------  ----------- --------------  -----------


                                  <c>               <c>         <c>       <c>          <c>          <c>
Goodwill (2)                         1,574             60          1,634         -              -             -
Preferred shares of a
subsidiary(1)                       (5,567)       (15,422)       (20,989)    (15,295)        (9,884)      (25,179)
Shareholders' equity (1)             7,801        (15,362)        (7,561)      5,523         (9,884)       (4,361)
Total liabilities and
shareholders'  equity (1)           17,580            -           17,580      24,220            -          24,220


(1)      Issuance of Preferred shares to a third party in a subsidiary - see
         Note 16a.3.

(2)      Goodwill arising from the acquiring of additional shares in EZchip -
         see Note 16.a.10.

</table>

<page>

                                 EXHIBIT INDEX

Exhibit Number                Description

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

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

23.1              Consent of Kost Forer & Gabbay.

99.1              Statement Pursuant to 18 U.S.C. Section 1350 - Certification
                  of Chief Executive Officer

99.2              Statement Pursuant to 18 U.S.C. Section 1350 - Certification
                  of Chief Financial Officer


<page>

                                                                  Exhibit 23.1

                        CONSENT OF INDEPENDENT AUDITOR



We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-71822) pertaining to the 1992 Stock Option Plan, of our
report dated February 11, 2002, with respect to the consolidated financial
statements of LanOptics Ltd. Included in this Annual Report on Form 20-F for
the year ended December 31, 2002.


Tel Aviv, Israel                            /s/ Kost, Forer & Gabbay
June 18, 2003                               --------------------------
                                            KOST, FORER & GABBAY
                                            A Member of Ernst & Young Global

<page>

                                                                  Exhibit 99.1

  Certification of Chief Executive Officer Pursuant to18 U.S.C. Section 1350,
                            as Adopted Pursuant to
                 Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the annual report on Form 20-F of LanOptics Ltd. (the
"Company") for the fiscal year ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Meir
D.Burstin, as Chairman of the Board of Directors of the Company, hereby
certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of
the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

         (1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and

         (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.


/s/ Meir D. Burstin
------------------------------
Name:   Meir D. Burstin
Title:  Chairman
Date:   June 18, 2003



This certification accompanies the Report pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
ss.18 of the Securities Exchange Act of 1934, as amended.

<page>

                                                                  Exhibit 99.2

  Certification of Chief Financial Officer Pursuant to18 U.S.C. Section 1350,
                            as Adopted Pursuant to
                 Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the annual report on Form 20-F of LanOptics Ltd. (the
"Company") for the fiscal year ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Dror
Israel, as Director of Finance of the Company, hereby certifies, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of his knowledge:

         (1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and

         (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.


/s/ Dror Israel
------------------------------
Name:   Dror Israel
Title:  Director of Finance
Date:   June 18, 2003



This certification accompanies the Report pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
ss.18 of the Securities Exchange Act of 1934, as amended.