SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549


                                 FORM 20-F/A5


             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 2001

                        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. 7,290,777 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"). We are now focused on our
independent business unit, E.Z. Chip Technologies Ltd. ("EZchip"), an Israeli
company in which we have a 57% ownership interest. EZchip is engaged in the
development of high performance network processors which constitute a mature
evolution of the processor components of our legacy LAN and WAN products. 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, 2000 and 2001 and for the three years ended December 31, 2001,
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,
1997, 1998 and 1999 and for the years ended December 31, 1997 and 1998 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.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                    1997         1998         1999          2000         2001
----------------------------------------------------------------------------------------------------------------
                                                        (in thousands, except share and per share data)
----------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
<S>                                                <C>          <C>            <C>          <C>          <C>
Net sales of networking solutions                 $16,659      $13,329        $7,820       $3,227       $1,449
----------------------------------------------------------------------------------------------------------------
Operating loss                                     (6,789)     (10,689)       (4,126)      (4,536)      (9,216)
----------------------------------------------------------------------------------------------------------------
Profit (loss) from continuing operations           (6,078)     (10,019)       (3,493)        (348)         129
----------------------------------------------------------------------------------------------------------------
Net profit (loss)                                  (4,637)     (13,652)       (7,484)      (6,600)         350
----------------------------------------------------------------------------------------------------------------

Per Share Data:

Loss from operations                                (0.87)       (1.84)        (0.64)       (0.67)       (1.25)
----------------------------------------------------------------------------------------------------------------
Net profit (loss) from continuing operations        (0.76)       (1.73)        (0.54)       (0.05)         0.02
----------------------------------------------------------------------------------------------------------------
Basic and diluted net profit (loss)                 (0.76)       (2.35)        (1.16)       (0.97)         0.05
----------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding    6,110,706    5,803,623     6,423,932    6,804,043    7,350,027
----------------------------------------------------------------------------------------------------------------

Balance Sheet Data:

Total assets                                       $36,099      $22,646       $16,095      $34,568     $ 24,220
----------------------------------------------------------------------------------------------------------------
Net assets                                         $31,103      $16,126       $11,123      $27,558      $20,818
----------------------------------------------------------------------------------------------------------------
Share capital                                      $22,854      $21,671       $24,176      $24,833      $24,848
----------------------------------------------------------------------------------------------------------------
Dividends declared per share                            --           --           --            --           --
----------------------------------------------------------------------------------------------------------------
</TABLE>

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 processing
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
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-1s is constrained. IBM is the sole manufacturer of the
NP-1. 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.

If we are unable to procure funding on favorable terms, we would not be able
to grow our business which could negatively affect our revenues.

         We are a developing company and expect to require significant funding
in order to expand our business. Given the state of development of our
products and the present economic environment, we believe that we presently
have sufficient funding resources to finance our operations through the next
12 months. When we do require additional funding, we may encounter difficulty
in raising such funding through the capital markets or otherwise. If we do not
obtain enough funding to support our future development when needed, our
business will suffer. The capital markets have recently been experiencing
severe downturns, especially relating to technology companies, and access to
capital has been virtually closed to all but a very few companies. Even if we
are successful in obtaining funding through the capital markets or otherwise,
such funding may not be on terms favorable to us. Furthermore, we may only be
able to raise additional funding from other investors which would dilute our
ownership interest in EZchip. A dilution of our interest in EZchip could cause
us to lose control of EZchip, which may have adverse consequences for our
business.

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-1999. Attacks on Israel by Palestinian terrorists, and military responses
by Israel, have accelerated considerably since late 1999. 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. The
Israeli government has reduced the benefits available under this program in
recent years and has indicated that it may reduce or eliminate these benefits
in the future. These tax benefits may not continue in the future at their
current levels or at any level. 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 termination or reduction of these tax
benefits could increase the taxes we pay in Israel and thereby seriously harm
our business, financial condition and results of operations.

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. We are now focused on our independent business unit, E.Z. Chip
Technologies Ltd., or EZchip, which is engaged in the development of high
performance network processors which constitute a mature evolution of the
processor components of our legacy LAN and WAN products.

         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 2001 to support our customers, our sales levels for these
legacy products have declined significantly from 1999 and we believe that they
will continue to decline.

         Through EZchip, we are developing high-performance network processors
for 10/40-Gigabit 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.

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 to 40 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 LAN switch. We are developing
an improved and less expensive version of the NP-1, called the NP-1c, that
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. We are also
developing the QX-1, a 10-Gigabit traffic manager that complements the NP-1 by
expanding its quality of service features, samples of which are scheduled for
availability late in 2002. We also initiated development of an additional
network processor, based on the same core technology, which will be capable of
operating at speeds up to 40 Gigabits per second, but further development of
this product is contingent upon market conditions. 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.

     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).

         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 released subsequent versions
of the EZdesign toolset in 2001 and early 2002, providing functional
enhancements.

         EZdriver is a toolset that facilitates the development of the control
path software for NP-1 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).

     Future Products

         We are presently developing the QX-1, a 10-Gigabit traffic manager
that is scheduled for availability late in 2002. 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. QX-1 is employed in
systems that require packet queuing and shaping, congestion management and
hierarchical scheduling.

         We are developing two advanced versions of the NP-1 network
processor. The first is an improved and less expensive version of the NP-1,
called the NP-1c, that uses an 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. We also began development of the NP-2, a 40-Gigabit,
seven-layer network processor based on the uniquely scalable architecture of
the NP-1, but further development of this product is contingent upon market
conditions.

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, 67 employees, representing about 80% 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):

                                                         Year Ended December 31,
                                                         -----------------------
                                                             2000         2001
                                                             ----         ----

Research and development costs, excluding amortization      $4,264       $6,892
Amortization of prepaid development and production costs*   $  267       $  542
Research and development, including amortization            $4,530       $7,434

----------------------
* 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 6 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. We work closely with 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 9
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.

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 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 chip surpasses 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. In the past we have been, and in the future may be, notified that we
may be infringing the intellectual property rights of third parties. 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.

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, assemble and test our NP-1 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 volume production will utilize IBM's
0.11-micron Cu-11 ASIC template. IBM will also manufacture the NP-1c, using
0.11-micron processes. 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 any late delivery or
failure to deliver products could result in delays in satisfying customer
demand, increased costs and loss of revenues.

Legacy Operations

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

         We continue to generate small amounts of revenue from sales and
royalties related to LanOptics and NetGuard legacy products. All of these
sales have been from existing inventory. Since LanOptics and NetGuard legacy
products are no longer being manufactured, revenue from sales of those
products will become immaterial.

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 $649,000 in 1999, $870,000 in 2000 and $1,127,000 in
2001. Our capital expenditures in 2000 and 2001 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 with two salespeople 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, which constitute a mature evolution of the processor components of
our legacy LAN and WAN products, through our subsidiary, EZchip. For the past
year and a half, 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, more recently, 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.

Results of Operations

         The following table sets forth for the periods indicated certain
financial data as a percentage of sales:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                                                       Year ended December 31,
------------------------------------------------------------------------------------------------------
                                       1997           1998          1999        2000           2001
------------------------------------------------------------------------------------------------------

<S>                                   <C>          <C>           <C>           <C>           <C>
Sales                                 100.0%       100.0%        100.0%        100.0%        100.0%
------------------------------------------------------------------------------------------------------
Cost of sales                          60.4%        63.4%        102.8%         52.8%         72.4%
------------------------------------------------------------------------------------------------------
Gross Profit                           39.6%        36.6%         (2.8%)        47.2%         27.6%
------------------------------------------------------------------------------------------------------
Research and Development costs, net:   16.4%        33.9%         23.6%        136.3%        513.1%
------------------------------------------------------------------------------------------------------
Selling, general and
Administrative expenses                61.1%        64.9%         23.2%         51.4%         174.6%
------------------------------------------------------------------------------------------------------
Restructuring income                    -            -             -             -            23.9%
------------------------------------------------------------------------------------------------------
Special charges                         -           18.0%          3.2%          -               -
------------------------------------------------------------------------------------------------------
Operating loss                        (40.8%)      (80.2)%)      (52.8%)      (140.5%)      (636.1%)
------------------------------------------------------------------------------------------------------
Financial income, net                   4.0%         4.0%          7.8%         22.5%         98.5%
------------------------------------------------------------------------------------------------------
Other income (expense), net            (0.1%)        -                         (14.4%)        56.2%
------------------------------------------------------------------------------------------------------
Income (loss) From Discontinued
Operations                              8.6%       (27.2%)       (51%)        (193.7%)        15.3%
------------------------------------------------------------------------------------------------------
Minority interest in earnings          (0.8%)        1.1%          0.3%         93.6%        490.4%
------------------------------------------------------------------------------------------------------
Net Income (loss)                     (20.2%)     (102.3%)       (95.7%)      (204.5%)        24.1%
------------------------------------------------------------------------------------------------------
</TABLE>


Year Ended December 31, 2001 Compared with Year Ended December 31, 2000

         Sales. Sales decreased by $1.8 million or 55% to $1.4 million in 2001
from $3.2 million in 2000. This decrease is attributable to the restructuring
that took place in the Company since mid-1999, in which we evolved our focus
to the network processors market (EZchip) from our legacy product lines
(LanOptics and NetGuard).

         Cost of Sales. Cost of sales decreased by $0.7 million or 38% to $1.0
million in 2001 (72% of sales), from $1.7 million in 2000 (53% of sales). The
decrease in Cost of Sales is mainly the result of the drop in Sales, which was
partially offset by a relatively higher composition of fixed cost components
in the total Cost of Sales in 2001.

         Gross Profit. Gross Profit decreased by $1.1 million or 74% to $0.4
million in 2001 (28% of sales), from gross profit of $1.5 million in 2000 (47%
of sales). This decrease was mostly attributable to the drop in Sales which
took place in 2001, in addition to a relatively higher composition of fixed
cost components in total Cost of Sales in 2001.

         Net Research and Development Cost. Research and Development Cost
consists mainly of the salary and benefits of engineers. Reported figures in
2000 and 2001 consist entirely of EZchip research and development costs.
Reported figures in 1999 consist of LanOptics and EZchip research and
development costs. Net expenses increased by $3.0 million or 69% to $7.4
million in 2001 (513% of sales) from $4.4 million in 2000 (136% of sales).
This increase was due to the increased investment in research and development
by EZchip, and consists primarily of additional research and development
personnel. The increase in costs as a percentage of revenues is also a result
of the drop in Sales.

         Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses consist primarily of salaries, advertising expenses,
participation in trade shows and collateral materials. These expenses
increased by $0.8 million or 52% to $2.5 million in 2001 (175% of sales) from
$1.7 million in 2000 (51% of sales). This increase was mainly due to the
increased investment in sales and marketing by EZchip. The increase in costs
as a percentage of revenues is also a result of the decline in Sales.

         Net Financial Income. Financial Income reflects the income or
expenses both from traditional investment income or financing expenses and
from exchange rate fluctuations and currency translation. Net Financial Income
increased by $0.7 million or 97% to $1.4 million in 2001 (98% of sales) from
$0.73 million in 2000 (23% of sales). This increase is attributable to the
interest received on the funds raised by EZchip in November 2000. The increase
in costs as a percentage of revenues is also a result of the decline in Sales.
Net Financial Income consisted of interest and foreign exchange income of
$1.44 million that was partially offset by financial expenses of $0.02 million
in interest, bank charges and losses arising from foreign currency exchange
rate fluctuations. In 2000 we had $0.73 million in Net Financial Income,
consisting of interest and foreign exchange income of $0.83 million that was
partially offset by $0.10 million of interest, bank charges and losses arising
from foreign currency exchange rate fluctuations.

         Minority Interest in Loss. Minority Interest in Loss of $7.1 million
primarily reflects the share of the minority shareholders in EZchip's loss for
2001. In 2000 Minority Interest in Loss was $3.0 million. Losses are allocated
among the various classes and series of EZchip shares according to their
respective ownership level, as determined by liquidation preference. 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 2001 compared to 2000.

         Discontinued Operations. Income (Loss) from Discontinued Operations
reflects the income (loss) resulting from NetGuard's operations. This loss
decreased by $6.5 million, or 103%, to a profit of $0.2 million in 2001, from
a loss of $6.3 million in 2000.

Year Ended December 31, 2000 Compared with Year Ended December 31, 1999

         Sales. Sales decreased by $4.6 million or 59% to $3.2 million in 2000
from $7.8 million in 1999. This decrease is attributable to the declining
markets for our legacy products (Token Ring Hubs).

         Cost of Sales. Cost of Sales decreased by $6.3 million or 79% to $1.7
million in 2000 (53% of sales), from $8.0 million in 1999 (103% of sales,
including an inventory write down of $3.0 million). Excluding inventory
write-offs, the decrease in Cost of Sales is mainly the result of the decline
in Sales.

         Gross Profit. Gross Profit increased by $1.7 million or 113% to $1.5
million in 2000 (47% of sales) from gross loss of ($0.2) million in 1999. This
increase was mostly attributable to an inventory write down that took place in
1999

         Net Research and Development Costs. Research and Development Costs
consist mainly of the salary and benefits of engineers. Reported figures in
2000 consist entirely of EZchip research and development costs. Reported
figures in 1999 consist of LanOptics research and development costs, which
partially included the costs of EZchip before it was incorporated as a
subsidiary. Net expenses increased by $2.6 million or 144% to $4.4 million in
2000 (136% of sales), from $1.8 million in 1999 (24% of sales). This increase
was due to the increased investment in research and development by EZchip. The
increase in costs as a percentage of revenues is also a result of the decline
in Sales.

         Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses consist primarily of advertising expenses,
participation in trade shows and collateral materials. These expenses
decreased by $0.1 million or 8.4% to $1.7 million in 2000 (51.4% of sales)
from $1.8 million in 1999 (23% of sales).

         Net Financial Income. Financial Income reflects the income or
expenses both from traditional investment income or financing expenses and
from exchange rate fluctuations and currency translation. Net Financial Income
increased by $0.12 million or 19% to $0.73 million in 2000 (23% of sales) from
$0.61 million in 1999 (8% of sales). This increase is attributable to the
funds raised by EZchip in November 2000. The increase in costs as a percentage
of revenues is also a result of the decline in Sales. Net Financial Income
consisted of interest and foreign exchange income of $0.83 million that was
partially offset by financial expenses of $0.10 million in interest, bank
charges and losses arising from foreign currency exchange rate fluctuations.
In 1999 we had $0.61 million in Net Financial Income, consisting of interest
and foreign exchange income of $0.74 million that was partially offset by
$0.13 million of interest, bank charges and losses arising from foreign
currency exchange rate fluctuations.

         Minority Interest in Loss. Minority Interest in Loss of subsidiaries
of $3.0 million primarily reflects the share in the loss for 2000 of EZchip's
minority shareholders. Losses are allocated among the various classes and
series of EZchip shares according to their respective ownership level, as
determined by liquidation preference. In 1999 Minority Interest in Loss was
$24,000 and was attributed to the minority shareholders of NetGuard.

         Discontinued Operations. Loss from Discontinued Operations of a
segment of a business reflects the losses resulting from NetGuard's
operations. This loss increased by $2.3 million, or 57%, to $6.3 million in
2000, from a loss of $4 million in 1999.

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, 2001,
and deficiency in shareholders' equity as of that date in accordance with US
GAAP were $7,570,000 and $4,361,000, respectively, as compared with net income
and shareholders' equity in accordance with Israeli GAAP, of $350,000 and
$5,522,000, 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 investment, 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 in 2001, and our operating activity was funded
mainly by cash reserves.

         Our working capital at December 31, 2001 decreased to $18.5 million
from $24.9 million at December 31, 2000. This decrease is attributed to the
operational losses during 2001.

         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 second quarter of 2003. However, if we grow more rapidly than
currently anticipated, 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 13b to the Company's Financial Statements.

Effective 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 2012.
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. For the Company's
effective corporate tax rate, see Note 11e of Notes to the Consolidated
Financial Statements.

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 during the
year ended December 31, 2001:

         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 is 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 degree 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. 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 two 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. An audit committee may
not approve an action or a transaction with a controlling shareholder, or with
an office holder, unless at the time of approval two outside directors are
serving as members of the audit committee and at least one of the outside
directors was present at the meeting in which an approval was granted.
Benjamin D. Gaon and Zvi Zur served on the Company's Audit Committee during
the year ended December 31, 2001, and are continuing to serve on the Company's
Audit Committee during 2002. The Company will, at all times, have an audit
committee that will satisfy both the requirements of Israeli law and of The
Nasdaq Stock Market.

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 interested 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.

         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 2001
to all its directors and officers as a group (6 persons) for services in all
capacities was approximately $384,000.

         The aggregate amount set aside or accrued by the Company during 2001
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 $34,000.

Employees:

         On June 15, 2002, the Company had 88 employees: 4 LanOptics
employees, and 84 EZchip employees. Four of EZchip's employees are in the
U.S., involved in sales and marketing. Sixty-seven 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,
-------------------------------------- --------- ------- --------
                                        1999      2000    2001
-------------------------------------- --------- ------- --------
LanOptics employees                      22        18       9
-------------------------------------- --------- ------- --------
EZchip employees                         20        60      84
-------------------------------------- --------- ------- --------
NetGuard employees                       63        47      --
-------------------------------------- --------- ------- --------
Total employees                         105       125      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 15, 2002, there were outstanding options to purchase
258,739 Ordinary Shares. Of these options, 243,239 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 15, 2002, there were outstanding options to purchase
ordinary shares of EZchip representing approximately 12.6% 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 15,
2002 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>
---------------------------------------------------------------- ------------------------- -------------
Name                                                               Number of Shares(1)       Percent
---------------------------------------------------------------- ------------------------- -------------
<S>                                                                      <C>                    <C>
Hanina Brandes(2) .............................................          564,017                7.72%
Eli Fruchter(2) ...............................................          610,596                8.36%
Comverse Parties(2)(3)(4)  ....................................          795,285               10.89%
     ComSor Venture Fund LDC(2)(3) ............................          636,485                8.71%
     Comverse Technology, Inc.(2)(3) ..........................          152,300                2.08%
     CTI Capital Corp.(2)(3) ..................................            6,500                0.09%
All Directors and executive officers as a group (3 persons)(5).          819,085               10.90%

(1)      The number of Ordinary Shares beneficially owned includes the shares issuable pursuant to stock options
         that are exercisable within 60 days of June 15, 2002. 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)      Prior to March 31, 2002, the Comverse Parties, Hanina Brandes, Eli Fruchter and certain other persons
         were parties to a Voting Agreement pursuant to which the parties agreed to vote in favor of a mutually
         agreed upon slate of nominees for Directors. On March 31, 2002, the parties agreed to terminate the
         Voting Agreement by unanimous consent. Accordingly, as of March 31, 2002, the Voting Agreement is of no
         further effect and does not bind the parties in any manner.

(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)      Share ownership data for the Comverse Parties and its members, and the nature of the ownership
         relations among the entities in that group, is taken from Amendment No. 4 to its Report on Schedule
         13D, dated April 26, 2002, filed by the Comverse Parties. CTI Capital Corp. or CTI, a Delaware
         corporation, and Quantum Industrial Partners LDC or QIP, a Cayman Islands limited duration company,
         each own 50% of the outstanding shares of ComSor Venture Fund LDC or ComSor, a Cayman Islands limited
         duration company. CTI may be deemed to share beneficial ownership of the Ordinary Shares held for the
         account of ComSor and to have sole beneficial ownership of the Ordinary Shares held for its account.
         CTI is a wholly-owned subsidiary of Comverse Technology, Inc. or Comverse, a New York corporation.
         Comverse may be deemed to share beneficial ownership of ComSor's Ordinary Shares and to have sole
         beneficial ownership of CTI's Ordinary Shares and the Ordinary Shares held for its account. QIH
         Management Investor, L.P. or QIHMI is a minority shareholder of and (pursuant to the constituent
         documents of QIP) is vested with investment discretion with respect to the portfolio assets held for
         the account of QIP. QIH Management, Inc. or QIH Management, is the sole general partner of QIHMI. Mr.
         George Soros, the sole shareholder of QIH Management, has entered into an agreement with Soros Fund
         Management LLC, pursuant to which Mr. Soros has agreed to use his best efforts to cause QIH Management
         to act at the direction of Soros Fund Management . Each of QIP, QIHMI, QIH Management, Soros Fund
         Management and Mr. Soros may be deemed to share beneficial ownership of ComSor's Ordinary Shares and
         disclaim beneficial ownership of any Ordinary Shares other than ComSor's Ordinary Shares.

(5)      As of June 15, 2002, all Directors and executive officers as a group (3 persons) held vested options
         exercisable into 208,489 Ordinary Shares at exercise prices ranging from $2.50 to $6.00. These options
         expire between 2002 and 2006.
</TABLE>

Related Party Transactions:

         The following summarizes the Company's transactions with affiliates:

<TABLE>
<CAPTION>
                                                                       Year ended December 31.
                                                              ----------------------------------
                                                              1999         2000            2001
                                                              ----         ----            ----
                                                                      (in thousands)

<S>                                                          <C>          <C>             <C>
Legal expenses paid to a law firm in which one of the        $67.0        $148.0          $119.0
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 Stock Market
and on the Tel Aviv Stock Exchange under the symbol "LNOP". Set forth below
are the high and low Nasdaq sales prices for the Company's Ordinary Shares for
each quarterly period since January 1, 1996 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
------------------------------------------------------------------------------------------------------------
1997
------------------------------------------------------------------------------------------------------------
<S>                                     <C>               <C>                <C>                <C>
First quarter                            $ 9.250          $ 6.875
------------------------------------------------------------------------------------------------------------
Second quarter                           $ 7.125          $ 4.859
------------------------------------------------------------------------------------------------------------
Third quarter                            $ 6.625          $ 4.625
------------------------------------------------------------------------------------------------------------
Fourth quarter                           $ 6.750          $ 3.688
------------------------------------------------------------------------------------------------------------
1998
------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------------
January                                 $  8.750          $ 6.070
------------------------------------------------------------------------------------------------------------
February                                $ 11.780          $ 7.400
------------------------------------------------------------------------------------------------------------
March                                   $ 14.000          $10.000
------------------------------------------------------------------------------------------------------------
April                                   $ 16.450          $ 7.750            $ 14.86            $ 8.99
------------------------------------------------------------------------------------------------------------
May                                     $ 13.600          $10.000            $ 12.20            $10.09
------------------------------------------------------------------------------------------------------------
June, as of June 15th.                  $ 10.90           $ 8.10             $ 10.11            $ 8.84
------------------------------------------------------------------------------------------------------------
</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 articles 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 10,000,000 Ordinary Shares,
par value NIS 0.02 per share, and 1,000 Deferred Shares, par value NIS 1 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. Holders of Deferred Shares have no
rights, other than the right to receive the par value of their shares 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 and Deferred 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
dividends without the approval of the shareholders.

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.
Within 21 days of receipt of the request, the Board must convene a special
meeting and send out notices setting forth the date, time and place of the
meeting. Such notice must be given at least 21 days but not more than 40 days
prior to the special meeting.

         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 affected our operations in various
ways, and also affected the right of non-residents of Israel to convert into
foreign currency amounts they received in Israeli currency, such as the
proceeds of a judgment enforced in Israel. Despite these restrictions, foreign
investors who purchased shares with foreign currency were able to repatriate
in foreign currency both dividends, after deduction of withholding tax, and
the proceeds from the sale of the Ordinary Shares. In May 1998, the Israeli
currency control regulations were significantly liberalized, and as a result
residents of Israel generally may deal freely in foreign currency and
non-residents of Israel generally may freely purchase and sell Israeli
currency and assets. There are currently no Israeli currency control
restrictions on remittances of dividends on the Ordinary Shares or the
proceeds from the sale of the Ordinary Shares. Legislation remains in effect,
however, pursuant to which currency controls can be imposed by administrative
action at any time.

Exchange Rates

         On December 31, 2001, the representative exchange rate between the
NIS and the U.S. dollar as published by the Bank of Israel was NIS 4.416 =
$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 2001, and through June 15, 2002.

-------------------------------------------------------------------------------
                            At End          Average
                            Of Period       Rate(1)        High          Low
-------------------------------------------------------------------------------
                            (NIS per $1.00)
-------------------------------------------------------------------------------
 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:
-------------------------------------------------------------------------------
 January                    4.602           4.537          4.637         4.437
-------------------------------------------------------------------------------
 February                   4.623           4.662          4.744         4.588
-------------------------------------------------------------------------------
 March                      4.668           4.664          4.716         4.622
-------------------------------------------------------------------------------
 April                      4.893           4.806          4.904         4.740
-------------------------------------------------------------------------------
 May                        4.916           4.894          4.968         4.829
-------------------------------------------------------------------------------
 June, as of June 15        4.954           4.966          4.994         4.928
-------------------------------------------------------------------------------

(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. holders 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.

         In recent years there have been several attempts to implement major
reforms in the Israeli system of taxation. These attempts have been
unsuccessful. On February 26, 2002 the Israeli Minister of Finance appointed a
new committee to recommend tax reforms. This committee submitted its report in
June 2002. The report recommends sweeping changes in taxation of individuals
and companies. We cannot be certain whether the proposed reform will be
adopted, when it will be adopted or what form any reform will ultimately take.

         Israeli law generally imposes a capital gains tax on the sale of
securities and any other capital asset. The basic rate applicable to
corporations is currently 36%. The maximum tax rate for individuals is 50%,
but as explained below the actual rate may be lower on the sale of securities
that are listed on an approved foreign securities market such as Nasdaq (35%)
or on the sale of securities of an industrial company that are listed on an
approved foreign securities market such as Nasdaq (exempt from tax). These
rates are subject to the provisions of any applicable bilateral double
taxation treaty, including the double taxation treaty between the United
States and Israel discussed below.

         Under existing regulations any capital gain realized by an individual
shareholder with respect to ordinary shares acquired on or after the initial
public offering of the shares will be subject to Israeli capital gains tax at
the reduced rate of 35% if the ordinary shares are listed on an approved
foreign securities market such as Nasdaq, provided that the individual is not
engaged in the business of trading in securities. There will be a complete
exemption from Israeli capital gains tax if these conditions are satisfied and
in addition LanOptics continues to qualify as an industrial company under
Israeli law. We believe that we may not be classified as an industrial company
beginning in 2002. Another exemption may be available, however, because our
shares are dual listed on the Tel-Aviv Stock Exchange. Shareholders are
advised to consult their tax advisors regarding the availability of this
exemption.

         Under the tax treaty between the United States and Israel (the
"Treaty"), effective since January 1, 1995, gain recognized on the sale or
other disposition of Ordinary Shares by a U.S. Holder who owned, directly or
indirectly, less than 10% of our voting stock at all times during the 12-month
period preceding such sale, exchange or other disposition will be subject to
tax only in the United States and not in Israel.

         Individuals who are non-residents of Israel are subject to income tax
on ordinary income derived from sources in Israel, or received in Israel. Such
sources of income include passive income such as dividends, royalties and
interests as well as non-passive income from business conducted in Israel.
Upon a distribution of dividends other than bonus shares (stock dividends),
income tax is generally withheld at source at the rate of 25%, with a rate of
15% for dividends generated by an approved enterprise, unless a double
taxation treaty is in effect between Israel and the shareholder's country of
residence that provides for a lower tax rate in Israel on dividends. Dividend
distributions by an Israeli corporation to another Israeli corporation out of
regular earnings are generally not subject to taxation.

         The Treaty provides for a maximum tax of 25% on dividends paid to a
resident of the United States, as defined in the Treaty. The Treaty further
provides for a tax of 12.5% on dividends paid by a company that does not have
an approved enterprise during the applicable period. Dividends paid by us to
U.S. Holders have qualified for this 12.5% rate during the preceding year and
the year to date.

         Residents of the United States generally will have withholding tax in
Israel deducted at the source. They may be entitled to a credit or deduction
for U.S. federal income tax purposes in the amount of the taxes withheld,
subject to detailed rules and limitations contained in the Treaty and in U.S.
tax legislation. See "U.S. Federal Income Tax Considerations, Taxation of U.S.
Holders." A non-resident of Israel who has had dividend income derived in
Israel from which tax was withheld at the source is currently exempt from the
duty to file an annual Israeli tax return with respect to such income,
provided such income was not derived from a business carried on in Israel by
such non-resident and that such non-resident does not derive other non-passive
income from sources in Israel.

U.S. Federal Income Tax Considerations

Taxation of U.S. Holders

         The following summary describes the material United States federal
income tax consequences to U.S. Holders (as defined below) of an investment in
the Company's Ordinary Shares. This summary does not, however, purport to be a
comprehensive description of all of the tax considerations that may be
relevant to a decision to acquire, hold or dispose of Ordinary Shares. The
summary applies only to U.S. Holders that will hold the Ordinary Shares as
capital assets and does not address special classes of holders, such as
dealers in securities, insurance companies, tax-exempt organizations,
financial institutions, persons that will hold Ordinary Shares as a part of an
integrated investment (including a "straddle") comprised of Ordinary Shares
and one or more other positions, holders whose "functional currency" is not
the U.S. dollar, or holders that own 10% or more of the voting shares of the
Company.

         In general, a "U.S. Holder" is any holder of Ordinary Shares who or
which is (i) a citizen or resident of the United States, (ii) a corporation or
another entity taxable as a corporation, created or organized in the United
States or under the laws of the United States or any state or possession
thereof, (iii) an estate the income of which is included in gross income for
United States federal income tax purposes, regardless of source or (iv) a
trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.

         Distributions. In general, for U.S. federal income tax purposes,
distributions paid by the Company, if any, in respect of the Ordinary Shares
to a U.S. Holder will, to the extent of the Company's current and accumulated
earnings and profits, so determined under U.S. tax principles be treated as
dividends, then as a non-taxable return of capital to the extent of such U.S.
Holder's adjusted tax basis in the Ordinary Shares, and thereafter, as gain
from the sale of a capital asset.

         The gross amount of any dividend includable in income shall include
the Israeli tax withheld at source as described above under "Israeli Tax
Considerations". Dividends paid in NIS will be included in the income of a
U.S. Holder in a U.S. dollar amount calculated by reference to the spot rate
in effect on the day of the distribution. Unless such payments are converted
into U.S. dollars on that day, the U.S. Holder generally could recognize
foreign currency gain or loss upon the subsequent disposition of the NIS.

         Dividends received by a U.S. Holder will generally be treated as
foreign source "passive income" or, with respect to certain holders,
"financial services income" for foreign tax credit purposes. In general, a
U.S. Holder may elect for each taxable year to claim a deduction or, subject
to certain limitations, a credit in computing its U.S. tax liability with
respect to Israeli taxes withheld. Dividends received by a U.S. Holder that is
a corporation generally will not qualify for dividends received deduction.

         Dispositions. Upon the sale or exchange of Ordinary Shares a U.S.
Holder will recognize gain or loss in an amount equal to the difference
between the amount realized on the sale or exchange and the U.S. Holder's
adjusted tax basis in the Ordinary Shares. Such gain or loss will be capital
gain or loss if the Ordinary Shares are held as capital assets in the hands of
the U.S. Holder and will be long term capital gain or loss if the Ordinary
Shares were held for more than one year at the day of the sale or exchange.
Gain recognized on the sale or other disposition of Ordinary Shares by a U.S.
Holder who owned, directly or indirectly, 10% or more of the voting stock of
the Company at all times during the 12-month period preceding such sale,
exchange or other disposition, will be treated under article 4(6) of the
Treaty as Israeli source income. Accordingly, if Israel were to impose tax on
any such gain, the Israeli tax would generally be available as a credit for
the U.S. Holder against U.S. federal income tax subject to the limitations
under U.S. federal income tax law.

         Passive Foreign Investment Companies. In general, a foreign
corporation will be a passive foreign investment company if either (i) 75% or
more of its gross income in a taxable year is passive income; or (ii) 50% or
more of the average value of its assets in a taxable year are held for the
production of, or produce, passive income. If a corporation is a passive
foreign investment company, a U.S. Holder who has held its Ordinary Shares
during more than one taxable year will be required to report any gain on the
disposition of the Ordinary Shares of such corporation as ordinary income
rather than capital gain, and to compute the tax liability on such gain, as
well as on certain dividends and other distributions, as if the income had
been earned ratably over each day in the U.S. Holder's holding period. Such
U.S. Holder automatically will be subject to the highest ordinary income tax
rate for each taxable year that the corporation was a passive foreign
investment company in which the items were treated as having been earned
regardless of the rate otherwise applicable to the shareholder during such
taxable year. In addition, the taxes attributable to these prior years will be
increased by an interest factor. Additionally, if a corporation is a passive
foreign investment company, a shareholder who acquires Ordinary Shares from a
decedent is denied the normally available step-up in the tax basis of such
Ordinary Shares to fair market value at the date of death and instead will
hold such Ordinary Shares with a tax basis equal to the decedent's basis, if
lower than the fair market value.

         Status of the Company as a Passive Foreign Investment Company.
Although not free from doubt, based on the Company's current and projected
income, assets and activities, the Company believes that it will not be
classified as a passive foreign investment company for its taxable year ending
on December 31, 2001 or any subsequent taxable year. However, there can be no
assurance that the Company will not in fact be considered to be a passive
foreign investment company for its taxable year ending on December 31, 2001 or
any other subsequent year because (i) the determination of whether or not the
Company is a passive foreign investment company will be based on the
composition of the income and assets of the Company and can be definitively
made only after the end of each taxable year, (ii) the value of the Company's
stock has been volatile historically, (iii) the Company owns substantial
amount of assets such as cash and marketable securities which are considered
as passive asset for purposes of the passive foreign investment company rules
and (iv) the legal and financial analysis to determine whether a company is a
passive foreign investment company 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 the Company's belief regarding its passive foreign
investment company status will not be challenged by the Internal Revenue
Service, or that a court will not sustain such challenge.

         We will notify U.S. Holders in the event that we conclude that we
will be treated as a passive foreign investment company for any taxable year,
and provide these U.S. Holders with such information as is necessary to enable
these U.S. Holders 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. If a U.S. Holder makes one of these two elections, distributions and
gain will not be recognized ratably as ordinary income over the U.S. Holder's
holding period or be subject to an interest charge as described above.
Further, gain on the sale of Ordinary Shares will be characterized as capital
gain and the denial of basis step-up at death described above will not apply.

         Both elections are subject to a number of specific rules and
requirements, and U.S. Holders are strongly urged to consult their tax
advisors concerning these elections if we become a passive foreign investment
company.

Backup Withholding and Information Reporting.

         Under certain circumstances, United States information reporting
and/or "backup withholding" of U.S. federal income tax on dividends on, and
the proceeds of the dispositions of, the Ordinary Shares may apply to U.S.
Holders. U.S. backup withholding tax will be allowed as a refund or credit
against the U.S. Holder's federal income tax liability, provided that certain
required information is furnished to the Internal Revenue Service.

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 this trend was reversed again, with the rate of inflation at
1.4% and the rate of devaluation at 8.31%. 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.


<PAGE>

                                  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:   March 17, 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 person 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: March 17, 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: March 17, 2003                                    /s/ Dror Israel
                                                         ----------------------
                                                         Dror Israel
                                                         Director of Finance


<PAGE>








                      LANOPTICS LTD. AND ITS SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS
                            AS OF DECEMBER 31, 2001





                      LANOPTICS LTD. AND ITS SUBSIDIARIES


                       CONSOLIDATED FINANCIAL STATEMENTS


                            AS OF DECEMBER 31, 2001


                                IN U.S. DOLLARS




                                     INDEX


                                                                          Page
                                                                        --------

Report of Independent Auditors                                             F-2

Consolidated Balance Sheets                                              F-3 - 4

Consolidated Statements of Operations                                       F-5

Statements of Changes in Shareholders' Equity                               F-6

Consolidated Statements of Cash Flows                                    F-7 - 8

Notes to Consolidated Financial Statements                              F-9 - 39




                                - - - - - - - -




                                             LANOPTICS LTD AND ITS SUBSIDIARIES.


ERNST & YOUNG             Kost Forer & Gabbay               Phone: 972-3-6232525
                          3 Aminadav St.                    Fax:   972-3-5622555
                          Tel-Aviv 67067, Israel




                        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, 2001
and 2000, 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, 2001. 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, 2001 and 2000, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2001, 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 20, 2002                              A Member of Ernst & Young Global



<page>
<table>
<caption>

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

                                                                               December 31,
                                                                       ------------------------------
                                                                           2001             2000
                                                                       -------------    -------------
     ASSETS

                                                                   <C>                  <C>
CURRENT ASSETS:
  Cash and cash equivalents                                              $   2,798          $ 4,639
  Short-term bank deposits   (Note 3b)                                           -           10,636
  Marketable securities  (Note 3a)                                          17,673           14,451
  Trade receivables (net of allowance for doubtful accounts of
   $ 51 and $ 418 as of December 31, 2001 and 2000, respectively)               26              722
  Other accounts receivable and prepaid expenses (Note 4)                      408              591
  Inventories (Note 5)                                                           -              129
                                                                       -------------    -------------

Total current assets                                                        20,905           31,168
                                                                       -------------    -------------

LONG TERM INVESTMENTS:
  Prepaid development and production costs (Note 6)                          1,325            1,867
  Severance pay fund                                                           709              515
                                                                       -------------    -------------

Total long term investments                                                  2,034            2,382
                                                                       -------------    -------------

PROPERTY AND EQUIPMENT, NET (Note 7)                                         1,281            1,018
                                                                       -------------    -------------

Total assets                                                              $ 24,220         $ 34,568
                                                                       =============    =============




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




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


                                                                               December 31,
                                                                       -----------------------------
                                                                           2001            2000
                                                                       -------------    ------------
   LIABILITIES AND SHAREHOLDERS' EQUITY


                                                                  <C>              <C>
CURRENT LIABILITIES:
  Trade payables                                                        $     473        $     930
  Other accounts payable and accrued expenses (Note 8)                      1,907            5,353
                                                                      -------------    -------------

Total current liabilities                                                   2,380            6,283
                                                                      -------------    -------------

ACCRUED SEVERANCE PAY                                                       1,022              727
                                                                      -------------    -------------

MINORITY INTEREST                                                               -              103
                                                                      -------------    -------------

PREFERRED SHARES IN A SUBSIDIARY (Note 1c)                                 15,295           22,297
                                                                      -------------    -------------

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 as of December 31, 2001 and
     2000;  Issued  and  outstanding:  7,290,777 and 7,284,652
     shares as of December 31, 2001 and 2000, respectively                     56               56
   Deferred shares of NIS 1 par value -
   Authorized, Issued and outstanding: 1,000 shares as of
     December 31, 2001 and 2000                                               -*)              -*)
  Additional paid-in capital                                               24,792           24,777
  Accumulated deficit                                                     (19,325)         (19,675)
                                                                      -------------    -------------

Total shareholders' equity                                                  5,523            5,158
                                                                      -------------    -------------

Total liabilities and shareholders' equity                               $ 24,220         $ 34,568
                                                                      =============    =============

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

                                                                      Year ended December 31,
                                                               ---------------------------------------
                                                                  2001          2000          1999
                                                               -----------   -----------   -----------

                                                           <c>           <c>           <c>
Revenues (Note 12)                                             $   1,449     $   3,227     $   7,820

Costs of revenues                                                  1,049         1,704         8,036
                                                               -----------   -----------   -----------

Gross profit (loss)                                                  400         1,523          (216)
                                                               -----------   -----------   -----------

Operating expenses:
  Research and development, net (Note 13a)                         7,434         4,398         1,847
  Selling and marketing, net                                       1,387           782         1,394
  General and administrative                                       1,141           879           421
  Other operating charges (income) (Note 13b)                       (346)            -           248
                                                               -----------   -----------   -----------

                                                                   9,616         6,059         3,910
                                                               -----------   -----------   -----------

Operating loss                                                    (9,216)       (4,536)       (4,126)
Financial income, net (Note 13c)                                   1,427           726           609
Other income, net (Note 13d)                                         813           465             -
                                                               -----------   -----------   -----------

Loss from continuing operations, before minority interest         (6,976)       (3,345)       (3,517)
Minority interest in losses of subsidiaries                        7,105         2,997            24
                                                               -----------   -----------   -----------

Income (loss) from continuing operations                             129          (348)       (3,493)
                                                               -----------   -----------   -----------

Discontinued operations:
  Loss from discontinued operations
     of a segment of a business                                        -        (5,546)       (3,991)
  Income (loss) on disposal of a segment of a business               221          (706)            -
                                                               -----------   -----------   -----------
                                                                     221        (6,252)       (3,991)
                                                               -----------   -----------   -----------

Net income (loss)                                                  $ 350      $ (6,600)     $ (7,484)
                                                               ===========   ===========   ===========

Basic and diluted net earnings (loss) per share from
  continuing operations                                            $ 0.02     $  (0.05)    $  (0.54)
                                                               ===========   ===========   ===========

Basic and diluted net earnings (loss) per share from
  discontinued operations                                          $ 0.03       $ (0.92)      $ (0.62)
                                                               ===========   ===========   ===========

Basic and diluted net earnings (loss) per share                    $ 0.05       $ (0.97)      $ (1.16)
                                                               ===========   ===========   ===========

Weighted average number of Ordinary shares used in
  computing basic and diluted net earnings (loss)
  per share                                                     7,350,027     6,804,043     6,423,932
                                                               ===========   ===========   ===========

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

</table>




<table>
<caption>

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



                                              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, 1999              5,696,835       1,000         $ 48         $ 21,623       $ (5,591)           $ 16,080
   Net loss                                        -           -            -                -         (7,484)             (7,484)
   Exercise of options                       162,500           -            1              405              -                 406
   Issuance of shares                        725,000           -            3            2,096              -               2,099
                                         ------------- -------------  -----------  -------------  ------------------  --------------

Balance as of December 31, 1999            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
                                         ============= =============  ===========  =============  ==================  ==============

*) 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,
                                                                ---------------------------------------
                                                                   2001          2000          1999
                                                                -----------    ----------   -----------

                                                             <C>            <C>          <C>
Cash flows from operating activities:
-------------------------------------
Net income (loss)                                                  $  350     $  (6,600)    $  (7,484)
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
   Depreciation                                                       536           638         1,749
   Amortization of prepaid production and development costs           542           267             -
   Write-off of property and equipment related to                       -           156           334
      discontinued operations
   Write-off of capitalized software development costs                  -           790         1,284
      related to discontinued operations
   Impairment of property and  equipment                              210             -             -
   Write-off of  inventories                                          129            67         4,266
   Unrealized gain on marketable securities                          (161)         (131)            -
   Minority interest in losses of subsidiaries                     (7,105)       (2,997)          (24)
   Write-off of investment in an affiliate                              -           673             -
   Loss (gain) on sale of property and equipment                      (14)          269            24
   Decrease in trade receivables                                      696           643         2,024
   Decrease in other accounts receivable and prepaid expenses         183            91           204
   Increase (decrease) in trade payables                             (457)           89          (319)
   Increase (decrease) in accrued expenses on disposal               (540)          706             -
         of segment
   Increase (decrease) in other accounts payable and               (2,906)         (585)         (736)
         accrued expenses
   Accrued severance pay, net                                         101            26           (97)
                                                                -----------   -----------   -----------

Net cash provided by (used in) operating activities                (8,436)       (5,898)        1,225
                                                                -----------   -----------   -----------

Cash flows from investing activities:
------------------------------------
Investment in short-term bank deposits                             (2,504)      (10,780)       (8,177)
Investment in marketable securities                               (12,522)      (13,976)       (1,790)
Proceeds from short-term bank deposits                             13,140         8,673         5,500
Proceeds from sale of marketable securities                         9,461           686         1,149
Purchase of property and equipment                                 (1,127)         (870)         (649)
Proceeds from sale of property and equipment                          132            79           544
Capitalization of software development costs                            -          (352)         (710)
                                                                -----------   -----------   -----------

Net cash provided by (used in) investing activities                 6,580       (16,540)       (4,133)
                                                                -----------   -----------   -----------


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,
                                                             -----------------------------------------
                                                                2001           2000           1999
                                                             -----------   -------------   -----------


                                                         <C>            <C>             <C>
Cash flows from financing activities:
Proceeds from issuance of Ordinary shares, net                       -             -           2,099
Proceeds from issuance of subsidiary's Preferred shares
  to a third party, net                                              -        25,179               -
Proceeds from exercise of options and warrants                      15           657             406
                                                             -----------   -------------   -----------

Net cash provided by financing activities                           15        25,836           2,505
                                                             -----------   -------------   -----------

Increase (decrease) in cash and cash equivalents                (1,841)        3,398            (403)
Cash and cash equivalents at the beginning of the year           4,639         1,241           1,644
                                                             -----------   -------------   -----------

Cash and cash equivalents at the end of the year               $ 2,798       $ 4,639         $ 1,241
                                                             ===========   =============   ===========

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)              -
                                                             -----------   -------------   -----------
                                                             $        -    $        -      $       -
                                                             ===========   =============   ===========



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 (except share and per share data)


NOTE 1:-    GENERAL

            a.    LanOptics Ltd. (the "Company"), an Israeli Corporation, was
                  incorporated under the laws of the State of Israel in 1990.
                  The Company's major business was the development,
                  manufacture and marketing under three segments - networking
                  solutions, network processors and Internet applications. The
                  networking solutions operation consisted the operations and
                  assets of the Company, that improve corporate Local Area
                  Networks (LANs) and Wide Area Networks (WANs) connectivity
                  and performance. On August 2001, LanOptics' Board of Directors
                  decided to cease further production of the networking solution
                  products.  Following this announcement, the networking
                  solutions operations have ceased, and are being run off (See
                  also Note 12a).  The network processors operations consists
                  of EZChip Technologies Ltd., a fabless semiconducter company
                  providing 10/40 Gigabit network processors for
                  next-generation 10-Gigabit switches and routers. EZChip
                  Technologies Ltd. was established in 1999 as a wholly-owned
                  subsidiary of the Compnay. The development of EZChip's
                  products, which are a mature evolution of its legacy LAN and
                  WAN products, commenced within the Company. Beginning mid
                  1999, the Company gradually reduced and ultimately ceased
                  the research and development of its LAN and WAN products and
                  focused on the research and development of EZChip's
                  products. 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
                  Internet applications operations consisted of (a) NetGuard
                  Ltd. and its subsidiaries NetGuard Inc and NetGuard Plc, and
                  (b) NetXchange Ltd and its subsidiary NetXchange Inc. At the
                  end of 1998, the Company's management determined to
                  discontinue the operations of NetXchange and in February
                  2001 the Company's management determined to discontinue the
                  operations of NetGuard which resulted in the discontinuation
                  of the Internet applications operation.

                  The Company's shares are listed for trade on the National
                  Association of Securities Dealers' Quotation System
                  ("NASDAQ") in the United States and, as of April 2002, the
                  Company's shares are also listed for trade in the Tel-Aviv
                  Stock Exchange (See Note 17).

            b.    On February 5, 2001, the management decided to close
                  NetGuard's activities, which developed and marketed Internet
                  software applications such as Guardian Pro which includes
                  Guardian Firewall and Bandwidth control software. As
                  discussed above, this determination along with this 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").


NOTE 1:-    GENERAL (cont.)

                  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 three years in the period ended December
                  31, 2001, and are summarized as follows:

<table>
<caption>

                                                                     Year ended December 31,
                                                             ----------------------------------------
                                                                2001          2000           1999
                                                             -----------   ------------   -----------


                                                            <c>           <c>            <c>
                 Revenues                                      $ 1,092       $ 5,125        $ 4,542
                 Cost of revenues                                 (260)       (1,745)        (1,056)
                 Research and development expenses                (126)       (1,110)          (750)
                 Selling, general and administrative              (504)       (8,453)        (4,870)
                   expenses
                 Special charges                                     -             -         (1,856)
                 Financial income (expenses)                        19           (69)            23
                 Other expenses, net                                 -             -            (24)
                                                             -----------   ------------   -----------

                 Net income (loss)                               $ 221      $ (6,252)      $ (3,991)
                                                             ===========   ============   ===========
</table>


            c.    In early 2000, EZChip issued 7,776,112 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 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).


                  As of December 31, 2001, the Company holds 57% of EZChip.

            d.    EZChip depends on a single manufacturer (IBM) for
                  development and production of EZChip's products. If this
                  manufacturer becomes unable or unwilling to continue to
                  develop, manufacture, assemble or test EZChip's products in
                  required volumes or a timely basis, any resulting
                  manufacturing delays could result in the loss of sales,
                  which could adversely affect operating results.

            e.    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 Generally Accepted
            Accounting Principles in the United States ("U.S. GAAP") differ in
            certain respects as applicable to the consolidated financial
            statements of the Company (see Note 16).

NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (cont.)

            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 its subsidiaries are
                  recorded in new Israeli shekels, however, since the majority
                  of the Company's 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
                  continue adjusting 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 remeasurment 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.

NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (cont.)

            g.    Inventories:

                  Inventories are stated at the lower of cost or market value.
                  Inventory write-offs are provided to cover risks arising
                  from 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 cost of
                  revenues. Cost is determined as follows:

                  Work in progress and finished products - on the basis of
                  computed 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:

<table>
<caption>

                                                                               %
                                                                       ---------------------

                                                                            <c>
                 Office furniture and equipment                                6
                 Computers, software and electronic equipment                  33
                 Motor vehicles                                                15
                 Leasehold improvements                                  Over the term of
                                                                            the lease
</table>

                  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 2001, 2000 and 1999, the Company recorded impairment
                  losses in the amount of $210 $156 and $334, 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 and 1999 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.   Preferred shares in a subsidiary:

                  Investment of third party in 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.

            j.    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, gain from issuance of the
                  subsidiary's shares to a third party in a development stage
                  company, is recorded as a deferred gain and amortized
                  according to the highest of (i) a three-year period; (ii)
                  the Company's interest in the subsidiary's losses.

NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (cont.)

            k.    Research and development costs:

                  Research and development costs, net of grants received are
                  charged to expenses as incurred.

            l.    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. 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,
                  2001, 2000 and 1999 were $ 107, $ 203 and $ (165),
                  respectively.

            m.    Income taxes:

                  The Company follows the asset and liability method of
                  accounting for income taxes in accordance with Israeli
                  accounting principles. Under Israeli accounting principles,
                  deferred income taxes are provided for differences resulting
                  from changes in the Israeli Consumer Price Index ("CPI")
                  (the basis for the Company's tax reporting) and changes in
                  the exchange rate of the NIS to the U.S. dollar.

                  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 computing the deferred taxes, as it is the Company's
                  intention to hold these investments.

                  The Company has not provided deferred taxes with respect to
                  undistributed tax exempt profits attributed to the "approved
                  enterprise" of subsidiaries which may be distributed, since
                  it is the Company's policy not to initiate a distribution of
                  dividend that will impose an additional tax liability on the
                  Company.

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


NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (cont.)

            n.    Basic and diluted 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 computation 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.

            o.    Accounting for stock based compensation:

                  The Company has elected to follow Accounting Principles
                  Board Opinion No. 25 "Accounting for Stock Issued to
                  Employees" ("APB 25") and FASB Interpretation No. 44
                  "Accounting for Certain Transactions Involving Stock
                  Compensation" ("FIN 44") in accounting for its employee
                  stock option plans. Under APB 25, when the exercise price of
                  the Company's stock options is less than the market price of
                  the underlying shares on the date of grant, compensation
                  expense is recognized. The pro forma disclosures required by
                  Statement of Financial Accounting Standard No. 123
                  "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
                  are provided in Note 10. SFAS No. 123 requires the use of
                  the option valuation model to measure the fair value of the
                  options at the grant date.

            p.    Warranty costs:

                  The Company provides a warranty for 3 years to its hardware
                  products and 14 months to NetGuard's hardware products at no
                  extra charge. A provision is recorded for estimated warranty
                  costs based on the Company's experience.

            q.    Revenue recognition:

                  The Company generates revenues from selling its products
                  directly to end-users and indirectly through resellers,
                  which are considered end users.

                  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.

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

NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (cont.)

            r.    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 amount of $0, $ 565 and $921 during 2001, 2000
                  and 1999, respectively. Including amounts related to
                  discontinued operations of $0, $ 565 and $ 403 during 2001,
                  2000 and 1999, respectively.

                  The Company also received non-royalty-bearing grants from
                  the Fund for Encouragement of Marketing Activity in the
                  amount of $25, $0 and $211 during 2001, 2000 and 1999,
                  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.

            s.    Advertising expenses:

                  Advertising expenses are charged to the statement of
                  operations, as incurred. Advertising expenses for the years
                  ended December 31, 2001, 2000 and 1999 amounted to $ 48, $
                  88 and $ 46, respectively.

            t.    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 and short term
                  deposits 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 mainly derived from
                  sales to customers located primarily in the United States
                  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.

NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (cont.)

                  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.

            u.    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,
                  short-term bank deposits, trade receivables, other account
                  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 market value is permanently lower than the
                  amortized cost then the marketable securities are amortized
                  to their market value. As for marketable securities' fair
                  value see Note 16a6.

            v.    Impact of recently issued accounting standards:

                  In May 2001, the Israel Accounting Standards Board published
                  Accounting Standard No. 7 regarding post balance sheet
                  events, and Accounting Standard No. 8 regarding
                  discontinuing operations and in July 2001, Accounting
                  Standard No. 11 regarding segment reporting. and in October
                  2001 Accounting Standard No. 13 regarding the effects of
                  changes in foreign exchange rates.

                  Accounting Standard No. 7 contains the conditions for post
                  balance sheet events that require adjustments and post
                  balance sheet events that are non-adjusting events,
                  including rules such as accounting for a dividend that are
                  different from those applied until now. Accounting Standard
                  No. 7 will apply to financial statements for periods ending
                  on or after December 31, 2001.

                  Accounting Standard No. 8 prescribes provisions for
                  presentation and disclosure with regard to the treatment of
                  discontinued operations, among them provisions regarding
                  presentation which are different from those applied until
                  now. Accounting Standard No. 8 will apply to financial
                  statements for periods beginning on or after January 1,
                  2002.

                  Accounting Standard No. 11 prescribes provisions with
                  respect to segment reporting. Accounting Standard No. 11 is
                  based on International Accounting Standard No. 14, pursuant
                  to which the Company prepared its financial statements,
                  since International Standard No. 14 constituted the accepted
                  practice in Israel. Accounting Standard No. 11 will apply to
                  financial statements for periods beginning January 1, 2002.

NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (cont.)

                  Accounting Standard No. 13 prescribes provisions with
                  respect to the effects of changes in foreign exchange rates.
                  This Standard replaces Interpretation No. 8 and
                  Interpretation No. 9 to Opinion No. 36 of the Institute of
                  Certified Public Accountants in Israel, which are eliminated
                  at the time of discontinuance of the adjustment of the
                  financial statements. The Standard deals with translation of
                  foreign transactions and translation of financial statements
                  of foreign operations for the purpose of their inclusion in
                  the financial statements of the reporting company. The
                  translation principles of Accounting Standard No. 13 are
                  different from those applied until now. Accounting Standard
                  No. 13 will apply to financial statements for periods
                  beginning after December 31, 2002.

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

NOTE 3:-    MARKETABLE SECURITIES AND SHORT-TERM DEPOSITS

            a.    Marketable securities:

                  Debt securities of U.S. and European corporations which bear
                  annual nominal interest of 5.7% - 9.125%.

            b.    Short-term bank deposits:

                  Short-term bank deposits in U.S. dollars with maturity dates
                  of four to twelve months, bearing annual nominal interest of
                  6.25%-7%.


NOTE 4:-    OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES


                                                           December 31,
                                                    ----------------------------
                                                       2001             2000
                                                    ------------    ------------
            Government authorities                      $   91            $  62
            Employees                                      126               86
            Prepaid expenses                               109               76
            Property and equipment held for sale             -              151
            Others                                          82              216
                                                    ------------    ------------
                                                        $  408            $ 591
                                                    ============    ============

NOTE 5:-    INVENTORIES

                                                           December 31,
                                                    ----------------------------
                                                       2001             2000
                                                    ------------    ------------
            Work in progress                          $      -         $    95
            Finished products                                -              34
                                                    ------------     -----------
                                                      $      -         $   129
                                                    ============     ===========


NOTE 6:-    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
            consist as follows: Development - Access to unique semiconductor
            communications cores and technologies, such as the NP-1c,
            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 1c).

            The Ordinary shares which 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 will be included in cost of sales based on
            quantities produced. The production costs will be amortized
            according to the ratio of units produced and the estimated units
            to be manufactured.

NOTE 6:-    PREPAID DEVELOPMENT AND PRODUCTION COSTS (Cont.)

            For the year ended December 31, 2001 and 2000, amortization
            expenses related to the development costs amounted to $ 542 and $
            267, respectively. Production costs were not yet amortized as
            EZChip had not yet commenced production.

            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, 2001 no write off was
            deemed necessary.

<table>
<caption>

NOTE 7:-    PROPERTY AND EQUIPMENT, NET
                                                                               December 31,
                                                                       ------------------------------
                                                                           2001             2000
                                                                       -------------    -------------

                                                                   <C>                <C>
            Cost:
              Office furniture and equipment                            $        7         $    522
              Computers, software and electronic equipment                   2,324            4,453
              Motor vehicles                                                    82              121
              Leasehold improvements                                             7              429
                                                                       -------------    -------------

                                                                             2,420            5,525
                                                                       -------------    -------------

            Accumulated depreciation                                         1,139            4,507
                                                                       -------------    -------------

            Depreciated cost                                             $   1,281       $    1,018
                                                                       =============    =============

            Depreciation expenses for the years ended December 31, 2001, 2000
            and 1999 amounted to approximately $ 536, $638 and $896,
            respectively.

NOTE 8:-    OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
                                                                               December 31,
                                                                       ------------------------------
                                                                           2001             2000
                                                                       -------------    -------------

            Employees and payroll accruals                              $    843         $    949
            Government authorities                                             -              110
            Accrued expenses                                                 898            2,392
            Provision for losses from discontinued operations                166              706
            Deferred gain from Issuance of subsidiary's Ordinary
              shares to a third party (1)                                      -              799
            Deferred revenues                                                  -              397
                                                                       -------------   --------------

                                                                        $  1,907         $  5,353
                                                                       =============   ==============
</table>

            (1)   During 2000, the gain from the issuance of EZchip's Ordinary
                  shares to a third party in the amount of $1,938, was
                  recorded as a deferred gain. For the years ended December
                  31, 2001 and 2000, the deferred gain amortization amounted
                  to $ 799 and $ 1,138, respectively, and recorded as other
                  income.

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 at rates of 2%-4.5% on 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 bears 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, 2001, the
                  Company has a contingent obligation to pay royalties with
                  respect to the aforementioned grants in the amount of $
                  7,802, of which $ 2,220 is related to discontinued
                  operations and $ 5,582 is related to LanOptics legacy
                  products.

                  Royalties paid or accrued during 2001, 2000 and 1999 were $
                  63, $ 254 and $ 277, respectively, and recorded as part of
                  cost of revenues.

            b.    Lease commitments:

                  The Company and its subsidiaries lease their facilities
                  under operating lease agreements, which will expire in 2006.
                  The minimum lease payments under non-cancelable operating
                  leases are as follows:

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

                       2002                        $ 146
                       2003                           99
                       2004                           60
                       2005                           40
                       2006                           20
                                          --------------------------
                                                   $ 365
                                          ==========================

                  Rent expenses for the years ended December 31, 2001, 2000
                  and 1999 amounted to $383, $482 and $ 766, respectively.

            c.    Litigation:

                  In 1999, a claim was filed by five former employees against
                  the Company to release their severance pay. On September 16,
                  2001 a verdict was rendered in favor of the plaintiffs and
                  the Company was obligated to release the employees severance
                  pay fund and to pay part of their legal expenses. The
                  Company recorded a provision in the amount of $ 25 in
                  respect of this litigation. The Company appealed the court's
                  decision.


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.

                       The holders of the Deferred shares have no rights,
                       other than the right to receive the nominal value of
                       their shares upon liquidation of the Company.

                  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 an 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.


NOTE 10:-   SHAREHOLDERS' EQUITY (cont.)

                       e)    Anti-dilution:

                             In the event that at any time after the original
                             issue 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 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 equals 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.    On May 16, 1999, the Company signed an investment agreement
                  according to which the Company issued 725,000 Ordinary
                  shares in consideration for $ 2,099. As for warrants, see
                  Note 10d.

            c.    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, 2001, an
                  aggregate of 125,111 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.

NOTE 10:-   SHARE HOLDERS' EQUITY (cont.)

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

                                                      Year ended December 31,
                               -----------------------------------------------------------------------
                                        2001                    2000                    1999
                               ------------------------ ----------------------  ----------------------
                                             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
              the beginning     313,614       $ 3.95     437,864     $ 3.61       447,375     $2.57
              of the year

             Granted             20,000       $ 4.15           -     $    -       277,739     $4.43

             Exercised           (6,125)      $ 2.50     (92,125)    $ 4.37      (162,500)    $2.50

             Forfeited          (32,500)      $ 4.65     (32,125)    $ 3.43      (124,750)    $2.50

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

            Outstanding at the
              end of the year   294,989       $ 3.92     313,614     $ 3.95       437,864     $3.61
                               ============ =========== =========== ==========  ============ =========

            Exercisable
              options at the    231,660       $ 3.87     129,663     $ 3.61       130,501     $2.73
              end of the year
                               ============ =========== =========== ==========  ============ =========
</table>


<table>
<caption>

                  The options outstanding as of December 31, 2001, have been separated into
                  exercise prices, as follows:

                                  Options       Weighted                    Options
                                outstanding     average       Weighted    exercisable      Weighted
                                   as of       remaining      average        as of         average
                  Exercise      December 31,   contractual    exercise    December 31,     exercise
                    price           2001          life         price          2001          price
                --------------  -------------  ----------- ------------- -------------  -------------
                                                 Years
                                               ----------


                   <c>          <c>            <c>             <c>        <c>               <c>
                      $ 2.5        59,250         1.78            $ 2.5      51,375            $ 2.5
                      $ 4.15       20,000         4.87            $ 4.15      5,000            $ 4.15
                      $ 4.234     194,739         1.29            $ 4.234   162,285            $ 4.234
                      $ 4.25       15,000         1.37            $ 4.25     10,000            $ 4.25
                      $ 6          6,000          2.99            $ 6         3,000            $ 6
                                -------------               ------------- -------------  -------------
                                  294,989                        $  3.92    231,660            $ 3.87
                                =============               ============= =============  =============
</table>

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% and 6.00% for 2001 and 1999, respectively, dividend
yields of 0% for each year , expected life for an option of five years for
each year and excepted volatility of 1.287 and 2.099, for 2001 and 1999,
respectively. No options were granted during 2000.

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

NOTE 10:-   SHARE HOLDERS' EQUITY (cont.)

<table>
<caption>

                  Pro forma information under SFAS 123:

                                                                      Year ended December 31,
                                                               --------------------------------------
                                                                 2001          2000          1999
                                                               ----------   -----------    ----------

                                                           <C>           <C>           <C>
                 Income (loss) from continuing operations
                   as reported                                  $  129       $  (348)       $ (3,493)
                                                               ==========    ===========    ==========

                 Income (loss) from discontinued
                   operations as reported                       $  221       $(6,252)       $ (3,991)
                                                               ==========    ===========    ==========

                 Net income (loss) as reported                  $  350       $  (6,600)     $ (7,484)
                                                               ==========    ===========    ==========

                 Pro forma loss from continuing
                   operations                                   $  (45)      $  (1,051)     $ (3,839)
                                                               ==========    ===========    ==========

                 Pro forma income (loss) from discontinued
                   operations                                   $  221       $  (6,252)     $ (3,991)
                                                               ==========    ===========    ==========

                 Pro forma net income (loss)                    $  176       $  (7,303)     $ (7,830)
                                                               ==========    ===========    ==========

                 Pro forma basic and diluted net loss per
                   share from continuing operations             $ (0.01)     $ (0.15)       $ (0.6)
                                                               ==========    ===========    ==========

                 Pro forma basic and diluted net earnings
                   (loss) per share from discontinued
                   operations                                   $ 0.03       $ (0.92)       $ (0.62)
                                                               ==========    ===========    ==========

                 Pro forma basic and diluted net earnings
                   (loss) per share                             $ 0.02       $ (1.07)       $ (1.22)
                                                               ==========    ===========    ==========

                  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>

<table>
<caption>

                                                    For exercise prices on the date of grant that
                                              -----------------------------------------------------------
                                                   Equal market price            Exceed market price
                                              -----------------------------  ----------------------------
                                                      December 31,                  December 31,
                                              -----------------------------  ----------------------------
                                                2001      2000      1999      2001      2000      1999
                                              --------- --------- ---------  --------  --------  --------


                                             <c>       <c>       <c>        <c>       <c>       <c>
                 Weighted average exercise      $ 4.15    $ -       $ 4.44     $ -       $ -       $ 4.25
                 price

                 Weighted average fair
                 value on date of grant         $ 3.62    $ -       $ 4.17     $ -       $ -       $ 3.93
</table>


NOTE 10:-   SHARE HOLDERS' EQUITY (cont.)

                  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, 2001, an
                  aggregate of 1,742,789 Ordinary shares of EZChip are still
                  available for future grant.

                  The options generally expire during the period of 7-10 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 4 years. Any options, which
                  are canceled or forfeited before expiration become available
                  for future grant.

                  The following table is a summary of activity for Ezchip's
                  stock option plans:

<table>
<caption>

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


                                                   <c>             <c>                          <c>
                Outstanding at the beginning of
                  the year                            3,516,500       $0.45            -           $ -

                  Granted                             2,078,711       $1.00         3,531,500     $0.45
                  Forfeited                            (103,000)      $0.61           (15,000)    $0.61
                                                     -------------- -------------- ------------- -----------

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

                Exercisable options at the end
                  of the year                         1,654,375       $0.40             -           $ -
                                                     ============== ============== ============= ===========

                  The options outstanding as of December 31, 2001, have been separated into
                  exercise  prices as follows:
</table>

<table>
<caption>

                                                                                             Weighted
                                 Options        Weighted                    Option            average
                   Weighted    Outstanding      average      Weighted      exercisable       exercise
                   average        as of        remaining      average        as of             price
                   exercise    December 31,   contractual    exercise      December 31,      of options
                     price        2001            life        price           2001           exercisable
                 -----------  -------------  -------------  ----------    --------------   ---------------
                      $                          Years           $                                $
                 -----------                 -------------  ----------                     ---------------

                  <c>       <c>                <c>             <c>       <c>                  <c>
                     0.40      2,960,000          5.34            0.4       1,654,375            0.40
                     0.72        448,500          5.41            0.72              -               -
                     1.00      2,083,711          7.24            1.00              -               -
                 -----------  -------------  -------------  ----------    --------------   ---------------
                               5,492,211                          0.65       1,654,375            0.40
                 ===========  =============  =============  ==========    ==============   ===============
</table>

NOTE 10:-   SHAREHOLDERS' EQUITY (cont.)

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

<table>
<caption>

                                                                For exercise prices on the date of
                                                                          grant that are
                                                              ---------------------------------------
                                                                    Equal               Exceed
                                                                  fair value          fair value
                                                              -------------------  ------------------
                                                                 December 31,        December 31,
                                                              -------------------  ------------------
                                                               2001       2000      2001      2000
                                                              --------   --------  --------  --------


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

                 Weighted average fair value on date of         $ 0.45     $ 0.21  $     -     $ 0.53
                 grant
</table>


            d.    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.

            e.    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.

            f.    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
                  ten 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 has been provided on income
                  attributable to EZChip "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, 2001, 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 for
                  tax purposes as of December 31, 2001, in the amount of $
                  30,720 as follows: $ 20,390 in Israel, $ 5,809 in the U.S
                  and $ 4,521 in the UK.

                  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.K. are for an indefinite
                  period.

                  Carryforward tax losses in the U.S. will expire in 2012
                  through 2021.

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

            d.    A reconciliation of the theoretical tax expense, assuming
                  all income is taxed at the regular statutory rate levied on
                  corporations in Israel up to December 31, 2001, and the
                  actual tax expense, is as follows:

<table>
<caption>

                                                                     Year ended December 31,
                                                               -------------------------------------
                                                                 2001         2000          1999
                                                               ----------   ----------    ----------

                                                           <C>           <C>          <C>
                  Loss from continuing operations before
                   minority interest as reported in the
                   statements of operations from continuing
                   operations                                  $ (6,976)    $ (3,345)     $ (3,517)
                                                               ==========   ===========   ===========

                 Statutory tax rate                                  36%          36%           36%
                                                               ==========   ===========   ===========

                 Theoretical tax benefit                       $ (2,511)    $ (1,204)     $ (1,266)
                 Decrease in benefit:
                 Effect of adjustments of the results for
                   tax purposes according to the CPI                 (7)         (16)          (18)
                 Carryforward losses and other for which
                   deferred taxes were not recorded               2,518        1,220         1,284
                                                               ----------   -----------   -----------
                 Income taxes in the statements of operations  $      -     $      -      $      -
                                                               ==========   ===========   ===========
</table>

            e.    Loss from continuing operations, before minority interest:

<table>
<caption>

                                                                    Year ended December 31,
                                                            -----------------------------------------
                                                               2001          2000            1999
                                                            -----------   ------------    -----------


                                                         <c>           <c>             <c>
                 Domestic                                   $  (7,182)    $  (2,500)      $  (2,152)
                 Foreign                                          206          (845)         (1,365)
                                                            -----------   -------------   -----------
                                                            $  (6,976)    $  (3,345)      $  (3,517)
                                                            ===========   =============   ===========
</table>

            f.    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 and its subsidiaries manage their business on
                  the basis of two reportable segments differentiated by
                  products: networking solutions and networking processors.

                  The networking solutions segment includes Fast Ethernet and
                  Gigabit Ethernet Switches. The networking solutions
                  operation improve corporate Local Area Networks (LANs) and
                  Wide Area Networks (WANs) connectivity and performance.

                  In August 2001, LanOptics' Board of Directors decided to
                  cease further production of the networking solutions
                  products. Following this announcement, the networking
                  solutions operations have ceased, and are being run off. The
                  Company continues to supply orders for its networking
                  solutions products from existing inventory and repairs or
                  replaces products under warranty obligations.

                  The networking processors segment includes the design,
                  development and marketing of 10/40 Gigabit network processor
                  for next generation 10-Gigabit Switches and routers.


NOTE 12:-   SEGMENTS AND GEOGRAPHIC INFORMATION (Cont.)

            The following data is presented in accordance with IAS 14:

<table>
<caption>

                                          Year ended December 31, 2001       Year ended December 31, 2000
                                        ---------------------------------- ----------------------------------
                                        Networking   Networking            Networking   Networking
                                        solutions    processors   Total     solutions   processors   Total
                                        -----------  ----------- --------- ------------ ----------- ---------

                                    <C>           <C>         <C>        <C>          <C>        <C>
Revenues
Sales to external customers               1,449            -       1,449     3,227            -       3,227
                                        ===========  =========== ========= ============ =========== =========
Results
Segments results                            276       (9,492)     (9,216)    1,135       (5,671)     (4,536)
                                        ===========  =========== ========= ============ =========== =========

Net loss from Ordinary activities                                 (9,216)                            (4,536)
Financial income                                                   1,427                                726
Other income, net                                                    813                                465
Minority interest in losses of                                     7,105                              2,997
  subsidiaries
                                                                 ---------                          ---------

Net income (loss) from continuing                                    129                               (348)
  operations
Net income (loss) from discontinuing                                 221                             (6,252)
operations
                                                                 ---------                          ---------

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


                                                December 31, 2001                  December 31, 2000
                                        ---------------------------------- ----------------------------------
Assets and liabilities
Segments assets                           5,565       18,655      24,220     7,755       26,662      34,417
                                        ===========  ===========           ============ ===========
Assets of subsidiary that                                              -                                151
  discontinued its operations
                                                                 ---------                          ---------

Total assets                                                      24,220                             34,568
                                                                 =========                          =========

Segments liabilities                      1,447        1,789       3,236     4,934        1,473       6,407
                                        ===========  ===========           ============ ===========
Liabilities of subsidiary that
  discontinued its operations                                        166                                706
                                                                 ---------                          ---------

Total liabilities                                                  3,402                              7,113
                                                                 =========                          =========
Other segment information
Depreciation and amortization                 -        1,078       1,078       302          542         844
                                        ===========  ===========           ============ ===========
Depreciation and amortization of
  subsidiary that discontinued its                                     -                                 61
  operation
                                                                 ---------                          ---------

Total depreciation and amortization                                1,078                                905

Expenditures for long-lived assets           23        1,104       1,127       447          423         870
                                        ===========  =========== ========= ============ =========== =========


<caption>

[TABLE CONTINUED]
                                       Year ended December 31, 1999
                                     ---------------------------------
                                     Networking  Networking
                                     solutions   processors    Total
                                     ----------- ------------ --------

                                  <C>         <C>          <C>
Revenues
Sales to external customers            7,820           -        7,820
                                     =========== ============ ========
Results
Segments results                      (3,174)       (952)      (4,126)
                                     =========== ============ ========

Net loss from Ordinary activities                              (4,126)
Financial income                                                  609
Other income, net                                                   -
Minority interest in losses of                                     24
  subsidiaries
                                                              --------

Net income (loss) from continuing                              (3,493)
  operations
Net income (loss) from discontinuing                           (3,991)
operations
                                                              --------

Net income (loss)                                             $(7,484)
                                                              ========
</table>



NOTE 12:-   SEGMENTS AND GEOGRAPHIC INFORMATION (Cont.)

            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, 2001, 2000 and 1999 and long-lived assets, as
                  of December 31, 2001, 2000 and 1999:

<table>
<caption>

                                    2001                     2000                     1999
                           -----------------------  ------------------------ ------------------------
                             Total     Long-lived     Total     Long-lived     Total      Long-lived
                           revenues      assets     revenues      assets      revenues      assets
                           ----------  -----------  ----------  ------------ -----------  -----------


                            <c>        <c>           <c>           <c>        <c>           <c>
            Israel             $ 273      $ 1,272       $ 860         $ 892      $2,647        $ 749
            United States      1,176            9       1,970            61       3,215          177
            Europe                 -            -         397            65       1,958          165
                           ----------  -----------  ----------  ------------ -----------  -----------
                             $ 1,449      $ 1,281     $ 3,227       $ 1,018      $7,820      $ 1,091
                           ==========  ===========  ==========  ============ ===========  ===========
</table>

NOTE 13:-   SELECTED STATEMENTS OF OPERATIONS DATA

<table>
<caption>

            a.    Research and development costs, net:

                                                                     Year ended December 31,
                                                              ---------------------------------------
                                                                 2001          2000         1999
                                                              ------------  ------------ ------------


                                                             <c>           <c>          <c>
                 Salaries, wages and employee benefits          $ 5,600       $ 3,043      $ 1,836
                 Materials and subcontractors                       292           514           54
                 Amortization of prepaid development costs          542           267            -
                 Other                                            1,000           574          475
                                                              ------------  ------------ ------------

                                                                  7,434         4,398        2,365
                 Less - royalty bearing grants (Note 9a)              -             -         (518)
                                                              ------------  ------------ ------------

                                                                $ 7,434       $ 4,398      $ 1,847
                                                              ============  ============ ============
</table>

            b.    Other operating charges (income), net:

                  During 2001, the Company has carried out a plan to focus on
                  the network processor market (see Note 1a). As part of the
                  plan, the Company wrote-off certain balances related to the
                  legacy family of products.


<table>
<caption>

            c.    Financial income:
                                                                     Year ended December 31,
                                                             -----------------------------------------
                                                                2001          2000           1999
                                                             ------------  ------------  -------------


                                                          <C>           <C>            <C>
                 Income:
                 Interest on short-term bank deposits and      $ 1,344         $ 818         $ 521
                   gains on marketable securities
                 Gains arising from foreign currency
                   translation adjustments                          99             9           217
                                                              -----------   ----------    ------------

                                                                 1,443           827           738
                                                              -----------   ----------    ------------
                 Expenses:
                 Interest, bank charges and losses on
                   marketable securities                            13            40            43
                 Losses arising from foreign currency
                   translation adjustments                           3            61            86
                                                              -----------   ----------    ------------

                                                                    16           101           129
                                                              -----------   ----------    ------------

                                                               $ 1,427         $ 726         $ 609
                                                              ===========   ==========    ============
d.          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                                             14             -            -
                                                              ------------  ------------ ------------


                                                                 $ 813       $   465       $    -
                                                              ============  ============ ============

NOTE 14:-   TRANSACTIONS WITH RELATED PARTIES

            Legal expenses:
              Professional fees to an entity controlled by
              a shareholder                                      $ 119       $   148       $   67
                                                              ============  ============ ============
</table>


<table>
<caption>

NOTE 15:-   SUBSIDIARIES
                                                                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.
            EZChip Ltd. (2)                                             57                  Israel
            EZChip Inc. (3)                                            100                  U.S.A.

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

            (2)  Represents the percentage of holdings in all classes of shares which is composed
                  of the following: Ordinary Shares 90.74%, Preferred B Shares 9.11%.
                 Preferred Shares of EZChip confer the same voting rights as Ordinary Shares.

            (3)  Represents the percentage of holdings by 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.

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

                       Under Israeli GAAP, income taxes are not provided on
                       the undistributed tax exempt profits of an "approved
                       enterprise", whose 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.

                 2)   Deferred tax assets consist of the following:

<table>
<caption>

                                                                                December 31,
                                                                        -----------------------------
                                                                           2001             2000
                                                                        ------------    -------------


                                                                     <c>             <c>
                      Provision for vacation and severance pay          $    238        $     76
                      Deferred tax liability from decrease in
                        interest in a subsidiary                               -             697
                      Loss carryforward                                   11,059           9,863
                                                                        ------------    -------------

                      Deferred tax assets before valuation
                      allowance                                           11,297          10,636
                      Less - valuation allowance                         (11,297)        (10,636)
                                                                        ------------    -------------
                      Net deferred tax assets                           $       -       $       -
                                                                        ============    =============
</table>

                       During the year ended December 31, 2001, the Company
                       and its subsidiaries in Israel, in the U.S. and in the
                       U.K have provided valuation allowances of $661 and
                       increased the valuation allowance to $11,297 in respect
                       of deferred tax assets resulting from tax loss
                       carryforwards and other temporary differences, since
                       they have a history of losses over the past years.
                       Management currently believes that it is more likely
                       than not that the deferred tax assets regarding the
                       loss carryforwards and other temporary differences will
                       not be realized.

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

                  2.   Gain from issuance of 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 years
                       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, 2001 and 2000 an
                       amount of $7,002 and $2,882 respectively, was
                       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
                       computation 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 is 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").

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

                       For the years ended December 31, 2001, 2000 and 1999,
                       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 294,989, 313,614 and 584,121 for the years
                       ended December 31, 2001 ,2000 and 1999, 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 ("dollar"). 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 2001 and 2000, 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 $ 42 and $ 114 in 2001 and 2000,
                       respectively.

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

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

            The amortized cost and estimated fair value of debt and marketable
            equity securities as at December 31, 2001 and 2000 by contractual
            maturity are shown below:

<table>
<caption>

                                          2001                                 2000
                           -----------------------------------------   -----------------------------------------
                                        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     $ 17,554    $ 119        $  -     $ 17,673   $ 14,434    $  17       $   -   $ 14,451
                           --------   --------    --------   --------   --------   --------   --------  --------

                           $ 17,554    $ 119        $  -     $ 17,673   $ 14,434    $  17       $   -   $ 14,451
                           ========   ========    ========   ========   ========   ========   ========  ========

                                                                   2001
                                                       ------------------------------
                                                        Amortized          Market
                                                           cost            value
                                                       -------------    -------------
          Available-for-sale:
          Matures in one year                           $  13,933        $  14,027
          Matures after one year through three              3,621            3,646
          years
                                                       -------------    -------------

          Total                                         $  17,554        $  17,673
                                                       =============    =============
</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, 2001 and 2000, net unrealized gains
                       on available-for-sale marketable securities amounted to
                       $ 119 and $ 17, respectively.

                  8.   Cumulative dividends on preferred shares:

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

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

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

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

                       In August 2001, the Financial Accounting Standards
                       Board issued Statement of Financial Accounting
                       Standards No. 144, Accounting for the Impairment or
                       Disposal of Long-Lived Assets ("SFAS 144"). Although
                       SFAS 144 supersedes FASB Statement No. 121, it retains
                       the requirements of SFAS 121 regarding recognition of
                       impairment loss for long-lived assets to be held and
                       used (based on undiscounted cash flows) and resolves
                       certain implementation issues. Also, the accounting
                       model used in SFAS 121 for long-lived assets to be
                       disposed of by sale (lower of carrying amount or fair
                       value less cost to sell) is broadened by SFAS 144 to
                       include discontinued operations if a component of an
                       entity has met the "held for sale" criteria. SFAS 144
                       also supersedes the accounting and reporting provisions
                       of APB - 30. Therefore, discontinued operations will no
                       longer be measured on a net realizable value basis and
                       future operating losses will no longer be recognized
                       before they occur. SFAS 144 also broadens the
                       presentation of discontinued operations to include a
                       component of an entity (rather than a segment of a
                       business).

                       The provisions of SFAS 144 are effective for financial
                       statements issued for fiscal years beginning after
                       December 15, 2001, and interim periods within those
                       years. The Company believes that the adoption of SFAS
                       144 will not have a material impact on the Company's
                       financial statements.

                  10.  Segment information:

                       According to Israeli GAAP, segment disclosures are
                       provided in accordance with the guidance of
                       International Accounting Standard No. 14, "Segment
                       Reporting" ("IAS No. 14"), which defines a business
                       segment as a distinguishable component of an enterprise
                       that is engaged in providing an individual product or
                       service (or a group of related products or services)
                       and that is subject to risks and returns that are
                       different from those of other business segments.

                       According to U.S. GAAP, segment disclosures are
                       provided in accordance with the guidance of Statement
                       of Financial Accounting Standard No. 131, "Segment
                       Reporting" ("SFAS No. 131"), which defines a business
                       as a component of an enterprise that (a) engages in
                       business activities from which it may earn revenues and
                       incur expenses (including revenues and expenses
                       relating to transactions with other components of the
                       same enterprise); (b) whose operating results are
                       regularly reviewed by the enterprise's chief operating
                       decision-maker to make decisions about resources to be
                       allocated to the segment and assess its performance;
                       and (c) for which discreet financial information is
                       available.

                       For all years presented, there were no material
                       differences between those two disclosure requirements,
                       as both definitions resulted in the same two reportable
                       segments.

NOTE 16:-   EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAEL AND U.S. GAAP ON THE
            FINANCIAL STATEMENTS (cont.)

            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,
                                                                   -----------------------------------
                                                                     2001         2000        1999
                                                                   ----------  -----------  ----------


                                                                  <c>        <c>         <c>
                 Net loss according to Israeli GAAP                  $ 350      $(6,600)    $ (7,484)

                 Gain from issuance of subsidiary's Ordinary
                 shares to third party                                (799)      (1,138)           -
                 Minority interest in losses of subsidiary -        (7,002)      (2,882)           -
                 Preferred shares
                 Unrealized gains on marketable securities            (119)         (17)         149

                 Income tax effect from discontinued operations          -            -          (75)
                                                                -----------   ----------   ----------

                 Net loss according to U.S. GAAP                   $(7,570)    $(10,637)     $(7,410)
                                                                ===========   ==========   ===========

                 Net earnings (loss) per share as reported
                 according to Israeli GAAP(basic and diluted)      $  0.05     $  (0.97)     $ (1.16)
                                                                ===========   ==========   ===========

                 Net loss per share  according to U.S. GAAP
                 (basic and diluted)                               $ (1.04)    $  (1.56)     $ (1.15)
                                                                ===========   ==========   ===========

                 Net loss per share from continuing operations
                   according to U.S. GAAP (basic and diluted)      $ (1.07)    $  (0.64)     $ (0.53)
                                                                ===========   ==========   ===========

                 Net earnings (loss) per share from
                   discontinued operations according to U.S.
                   GAAP (basic and diluted)                        $  0.03     $  (0.92)       (0.62)
                                                                ===========   ==========   ===========

                 Weighted average number of Ordinary shares
                   used in computing net losses per share
                   under U.S GAAP (basic and diluted)            7,287,715    6,804,043    6,423,932
                                                                ===========   ==========   ===========
</table>


<table>
<caption>

                  2.   On balance sheet items:

                                         December 31, 2001                 December 31, 2000
                                  --------------------------------  ---------------------------------
                                  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>
        Other accounts payable
         and accrued expenses (1) $  1,907   $       -   $  1,907  $   5,353  $    (799)   $   4,554

        Preferred shares of a
          subsidiary (2)            15,295       9,884     25,179     22,297      2,882       25,179
        Shareholders' equity
        (1), (2)                     5,523      (9,884)    (4,361)     5,158     (2,083)       3,075
        Total liabilities and
        shareholders' equity
        (1), (2)                  $ 24,220    $      -    $24,220   $ 34,568  $       -     $ 34,568
</table>

      (1)      Gain from issuance of a development stage subsidiary's Ordinary
               shares - see Note 16a.2.

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


NOTE 17:-   SUBSEQUENT EVENTS (UNAUDITED)

            In April 1, 2002 the Company completed the listing of its shares
            for trade in the Tel-Aviv Stock Exchange ("TASE").

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



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