---

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# UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

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

# OR

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

For the fiscal year ended December 31, 2008

# OR

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

# For the transition
period from __________ to __________

# OR

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

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

# Commission file number
0-20860

EZCHIP SEMICONDUCTOR LTD. (f/k/a 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)
Dror Israel
Chief Financial Officer
EZchip Semiconductor Ltd.
1 Hatamar Street
PO Box 527
Yokneam 20692, Israel
Tel: +972-4-959-6666
Tel: +972-4-959-4166(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

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

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

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

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



---

---

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

23,344,004 Ordinary Shares, par value NIS 0.02 per share (as of December 31, 2008)

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

Yes o No x

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

Yes o No x

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

Yes x No o

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

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

Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included in this
filing:

|            |                                                             |        
|----------- | ----------------------------------------------------------- | -------
|
|
|
|
|U.S. GAAP x | International Financial Reporting Standards                 | Other o
|            | as issued by the International Accounting Standards Board o

If Other has been checked
in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow:

Item 17 o Item 18 o

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

Yes o No x

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



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# TABLE OF CONTENTS

|       |          |                                                         |   
|------ | -------- | ------------------------------------------------------- | --
|
|
|
|
|PART I |          |                                                         | 6 
|       | ITEM 1.  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   | 6 
|       | ITEM 2.  | OFFER STATISTICS AND EXPECTED TIMETABLE                 | 6 
|       | ITEM 3.  | KEY INFORMATION                                         | 6 
|       | A.       | SELECTED CONSOLIDATED FINANCIAL DATA                    | 6 
|       | B.       | CAPITALIZATION AND INDEBTEDNESS                         | 6 
|       | C.       | REASONS FOR THE OFFER AND USE OF PROCEEDS               | 7 
|       | D.       | RISK FACTORS                                            | 7 
|       | ITEM 4.  | INFORMATION ON THE COMPANY                              | 16
|       | A.       | HISTORY AND DEVELOPMENT OF THE COMPANY                  | 16
|       | B.       | BUSINESS OVERVIEW                                       | 16
|       | C.       | ORGANIZATIONAL STRUCTURE                                | 25
|       | D.       | PROPERTY, PLANTS AND EQUIPMENT                          | 25
|       | ITEM 4A. | UNRESOLVED STAFF COMMENTS                               | 26
|       | ITEM 5.  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS            | 26
|       | A.       | OPERATING RESULTS                                       | 26
|       | B.       | LIQUIDITY AND CAPITAL RESOURCES                         | 34
|       | C.       | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES          | 36
|       | D.       | TREND INFORMATION                                       | 37
|       | E.       | OFF-BALANCE SHEET ARRANGEMENTS                          | 37
|       | F.       | TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS           | 38
|       | ITEM 6.  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES              | 38
|       | A.       | DIRECTORS AND SENIOR MANAGEMENT                         | 38
|       | B.       | COMPENSATION OF DIRECTORS AND OFFICERS                  | 40
|       | C.       | BOARD PRACTICES                                         | 40
|       | D.       | EMPLOYEES                                               | 46
|       | E.       | SHARE OWNERSHIP                                         | 47
|       | ITEM 7.  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS       | 49
|       | A.       | MAJOR SHAREHOLDERS                                      | 49
|       | B.       | RELATED PARTY TRANSACTIONS                              | 50
|       | C.       | INTERESTS OF EXPERTS AND COUNSEL                        | 51
|       | ITEM 8.  | FINANCIAL INFORMATION                                   | 51
|       | A.       | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION | 51
|       | B.       | SIGNIFICANT CHANGES                                     | 51
|       | ITEM 9.  | THE OFFER AND LISTING                                   | 52
|       | A.       | OFFER AND LISTING DETAILS                               | 52
|       | B.       | PLAN OF DISTRIBUTION                                    | 53
|       | C.       | MARKETS                                                 | 53
|       | D.       | SELLING SHAREHOLDERS                                    | 53
|       | E.       | DILUTION                                                | 53
|       | F.       | EXPENSE OF THE ISSUE                                    | 53
|       | ITEM 10. | ADDITIONAL INFORMATION                                  | 53
|       | A.       | SHARE CAPITAL                                           | 53
|       | B.       | MEMORANDUM AND ARTICLES OF ASSOCIATION                  | 53
|       | C.       | MATERIAL CONTRACTS                                      | 55
|       | D.       | EXCHANGE CONTROLS                                       | 56
|       | E.       | TAXATION                                                | 56
|       | F.       | DIVIDEND AND PAYING AGENTS                              | 64
|       | G.       | STATEMENT BY EXPERTS                                    | 64
|       | H.       | DOCUMENTS ON DISPLAY                                    | 64
|       | I.       | SUBSIDIARY INFORMATION                                  | 65



---

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|           |           |                                                                              |   
|---------- | --------- | ---------------------------------------------------------------------------- | --
|
|
|
|
|           |           |                                                                              |   
|           | ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 65
|           | ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 66
|PART II    |           |                                                                              | 66
|           | ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 66
|           | ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 66
|           | ITEM 15.  | CONTROLS AND PROCEDURES                                                      | 66
|           | ITEM 16.  | [RESERVED]                                                                   | 67
|           | ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 67
|           | ITEM 16B. | CODE OF ETHICS                                                               | 67
|           | ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 68
|           | ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 68
|           | ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 68
|           | ITEM 16F. | CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT                                 | 68
|           | ITEM 16G. | CORPORATE GOVERNANCE                                                         | 69
|PART III   |           |                                                                              | 70
|           | ITEM 17.  | FINANCIAL STATEMENTS                                                         | 70
|           | ITEM 18.  | FINANCIAL STATEMENTS                                                         | 70
|           | ITEM 19.  | EXHIBITS                                                                     | 70
|SIGNATURES |           |                                                                              | 72



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INTRODUCTION

We
were  incorporated  as a limited  liability  company under the laws of the State of
Israel in 1989. We changed our name from LanOptics Ltd. to EZchip  Semiconductor  Ltd. on
July 22, 2008.  Until 1999, our principal  business was the development,  manufacturing
 and  marketing  of  solutions  and  Internet  applications  to improve the  connectivity
 and performance  of corporate  Local Area  Networks and Wide Area  Networks.  Our
 business  now consists  exclusively  of the business  of our  subsidiary,  EZchip
 Technologies  Ltd.,  or EZchip  Technologies,  a  company  that is  engaged  in the
development and marketing of Ethernet network  processors for networking  equipment.  We
currently own  approximately  99% of the outstanding  shares of EZchip  Technologies and
approximately 89% of EZchip  Technologies on a fully diluted basis, taking into account
EZchip  Technologies  options and shares held by current and former employees.  As used
in this Annual Report,  the terms  "we,"  "us,"  "our" and "our  company"  mean EZchip
 Semiconductor  Ltd.  and its EZchip  Technologies subsidiary  taken  together,  unless
 otherwise  expressly  stated.  Our ordinary  shares are traded on the NASDAQ  Global
Market and on the Tel-Aviv Stock Exchange under the symbol "EZCH."

Our
 consolidated  financial  statements  appearing  in this Annual  Report are  prepared in
U.S.  dollars and in accordance with generally accepted accounting principles in the
United States, or U.S. GAAP.

All
 references in this Annual Report to "dollars" or "$" are to U.S.  dollars and all
 references in this Annual Report to "NIS" are to New Israeli Shekels.  The
 representative  exchange rate between the NIS and the dollar on December 31, 2008 as
published by the Bank of Israel was NIS 3.802 per $1.00.

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

This
Annual Report on Form 20-F contains various  "forward-looking  statements" within the
meaning of Section 27A of the Securities  Act of 1933, as amended,  and Section 21E of
the  Securities  Exchange Act of 1934, as amended,  or the Exchange  Act,  and within
 the  Private  Securities  Litigation  Reform Act of 1995,  as  amended.  Such
 forward-looking statements  reflect our current view with  respect to future  events and
 financial  results.  Forward-looking  statements usually  include  the  verbs,
  "anticipates,"   "believes,"   "estimates,"  "expects,"  "intends,"  "plans,"
 "projects," "understands"  and other verbs  suggesting  uncertainty.  We remind  readers
that  forward-looking  statements  are merely predictions and therefore  inherently
 subject to uncertainties and other factors and involve known and unknown risks that
could  cause the actual  results,  performance,  levels of  activity,  or our
 achievements,  or industry  results,  to be materially different from any future
results,  performance,  levels of activity, or our achievements  expressed or implied by
such  forward-looking  statements.  Readers  are  cautioned  not to  place  undue
 reliance  on  these  forward-looking statements,  which speak only as of the date of
filing of this Annual  Report on Form 20-F.  We undertake no obligation to publicly
release any revisions to these  forward-looking  statements to reflect events or
circumstances after such date or to reflect the occurrence of unanticipated  events.  We
have attempted to identify  additional  significant  uncertainties and other  factors
 affecting  forward-looking  statements  in the Risk  Factors  section  which  appears in
Item 3.D "Key Information -Risk Factors."



---

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PART I

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

Not
applicable.

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

Not
applicable.

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

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

The
 following  selected  consolidated  financial  data  is  derived  from  our  audited
 consolidated  financial statements,  which have been  prepared  in  accordance  with
U.S.  GAAP.  The  selected  income  data for the years  ended December,  31, 2006,  2007
and 2008,  and the  selected  balance  sheet data as at December  31, 2007 and 2008,
 have been derived from our audited  consolidated  financial  statements set forth in
"Item 18 - Financial  Statements." The selected income data for the years ended
 December,  31, 2004 and 2005,  and the  selected  balance  sheet data as at December
 31, 2004, 2005 and 2006, have been derived from our previously  published audited
 consolidated  financial  statements,  which are not included in this Annual Report.  The
selected  financial  data set forth below should be read in conjunction  with and are
qualified by reference to "Item 5. Operating and Financial  Review and  Prospects,"  and
the audited  consolidated financial statements and notes thereto included elsewhere in
this Annual Report.

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

|B. | CAPITALIZATION
AND INDEBTEDNESS
|-- | -------------------------------

Not
applicable.

6

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|C. | REASONS
FOR THE OFFER AND USE OF PROCEEDS
|-- | -----------------------------------------

Not
applicable.

|D. | RISK
FACTORS
|-- | ------------

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

We depend on a very limited number
of key customers. If we are unable to maintain our relationship with these customers or if
these customers significantly reduce production of carrier Ethernet switches/ routers
incorporating our products, our future revenues and growth will be materially adversely
affected.

Two
major tier-1 vendors of carrier Ethernet switches/routers, or CESRs, which together
represent over 50% of our target CESR market, are currently designing several of their
CESR platforms based on EZchip Technologies network processors. Juniper Networks, our
largest customer, is currently in production with NP-2 based products. Juniper Networks
accounted for approximately 55% of our 2008 revenues, and we expect Juniper Networks will
account for a substantial portion of our revenues in 2009. The second major tier-1 vendor
of CESRs has selected a customized version of NP-3 for several of its CESR product lines.
This version of NP-3 moved into production in the first quarter of 2009. We expect that
these two CESR vendors will together account for a substantial majority of our revenues in
2009 and the foreseeable future.

Our
future revenues and growth will depend in large part on our relationship with these two
CESR vendors in 2009 and beyond. If one of these vendors decides not to incorporate our
products into its future CESR products or to cease incorporating our network processors in
its current products, or purchases significantly lower quantities than expected due to
global economic conditions or otherwise, or if the products that incorporate our network
processors are not commercially successful, our future revenues and the growth of our
business will be materially adversely affected.

Continuing unfavorable global
economic conditions could have a material adverse effect on our business, operating
results and financial condition.

The
recent crisis in the financial and credit markets in the United States, Europe and Asia
has led to a global economic slowdown, with the economies of the United States and Europe
showing significant signs of weakness. If the United States or European economy weakens
further, carriers may reduce or postpone their technology spending significantly. This
could result in reductions in sales of networking equipment that incorporate our products,
longer sales cycles, slower implementation of new carrier Ethernet networks and increased
price competition. Any of these events would likely harm our business, operating results
and financial condition. If global economic and market conditions, or economic conditions
in the United States, Europe or Asia or other key markets continue to deteriorate, our
business, operating results and financial condition may be materially adversely affected.

We are dependent on the networking
equipment market for our growth, and if it does not grow, then we will not be able to
expand our business.

Although
there are many companies operating in the networking equipment market, a significant
portion of the market is controlled by a limited number of companies. The growth of our
network processor business depends in part on increased acceptance and use of networking
equipment that is developed and manufactured by companies with significant market share.
We depend on the ability of our target customers, specifically those with a significant
share of the networking equipment market, to develop new products and enhance existing
products for the networking equipment market that incorporate our products and to
introduce and promote their products successfully. The market for networking equipment
depends in part upon the markets acceptance of packet-based converged telecom
networks, in particular carrier Ethernet networks, as well as 10 Gigabit and greater
Ethernet technologies that enable the forwarding of data at a high speed. Ultimately, the
development rate of these technologies may be slower than we anticipate. If the use of
such networking equipment does not grow as we anticipate due to global market conditions
or otherwise, if we are unsuccessful in maintaining our relationships with our current
customers, specifically those with a significant share of the networking equipment market,
and creating relationships with other target customers with significant market share, if
our target customers do not incorporate our products into theirs, or if the products of
our target customers that incorporate our network processors are not commercially
successful, our growth will be impeded.

7

---

---

We have had a limited operating
history in the network processor industry and our future financial results are difficult
to predict.

Our
future success will be subject to the risks we will encounter in the network processor
industry. We have a limited operating history in the industry, with our first product
sales in the second quarter of 2002 and total sales through December 31, 2008 of
approximately $74 million. We have incurred operating losses in each of the last five
years. Our limited operating history makes it difficult to evaluate the prospects of our
business, particularly in light of the current global economic conditions. Moreover, the
network processor industry is constantly evolving and is subject to technological and
competitive forces beyond our control. Our ability to design and market products to meet
customer demand and the revenue and income potential of our products and business are
unproven. As an early stage company in the developing network processor industry, we face
numerous risks and uncertainties. Some of these risks relate to our ability to:

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

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

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

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

| |  | respond
to competitive market conditions; and
| | - | ---------------------------------------------

| |  | respond
to global economic conditions.
| | - | --------------------------------------

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

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

We
recently announced a new family of network processors targeting Ethernet Access
applications. We expect several models of the network processors, named NPA, to be offered
in 2009. The NPA product family addresses the transition of carrier access from
ATM/TDM based networks to Ethernet packet-based networks and the provisioning of
triple-play services that command increased bandwidth and service guarantees to
residential and business users. We may not be successful in developing, introducing and
marketing these new offerings or in addressing all or any portion of the potential market
for these offerings. We may experience difficulties that could delay or prevent the
successful development, introduction and marketing of these offerings. Furthermore, our
new offerings may not adequately meet the requirements of the marketplace or achieve
market acceptance. If we do not timely develop and introduce these offerings or respond in
a timely manner to changing market conditions, customer requirements or global economic
conditions, the growth of our business may be adversely affected.

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

8

---

---

Many of our competitors and
potential competitors are much larger than us, and if we are unable to compete effectively
we could lose our market share and revenues.

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

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

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

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

We may have to redesign our
products to meet rapidly evolving industry standards and customer specifications, which
could delay our production and increase our operating costs.

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

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

Because our products have lengthy
design and development cycles, we could experience delays in generating revenues or
cancellation of customer contracts.

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

9

---

---

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

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

If we are unable to adequately
protect our technology or other intellectual property through patents, copyrights, trade
secrets, trademarks and other measures, our competitors could use our proprietary
information and we could lose our competitive advantage.

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

Our products employ technologies
that may infringe on the proprietary rights of third parties, which may expose us to
litigation and prevent us from selling our products.

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

Because the processes used to
manufacture our products are complex, customized to our specifications and can only be
performed by a limited number of manufacturing facilities, we may experience delays in
production and increased costs.

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

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

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

10

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We
have entered into an agreement with a sole supplier for the manufacture of each of our
existing network processor models and we expect to use a sole supplier for our next
generation of network processors as well. Our NP-1c and NP-3 network processors are
manufactured by IBM. Our NP-2 network processor, our special version NP-3 network
processor, and our NPA and NP-4 network processors (currently under development), are or
are expected to be manufactured by Taiwan Semiconductor Manufacturing Co., or TSMC,
through third parties that coordinate and assume responsibility for various aspects of the
manufacturing process. IBM, TSMC or any future sole supplier for our current and future
products may reduce or delay shipment if its ability to manufacture network processors is
constrained. If a sole supplier of our network processors, a third party that arranges for
their manufacture, or any other subcontractor fails to deliver network processors or
necessary components or services on time or at all, our business could be severely harmed.
In addition, if the current manufacturing arrangement between our third party
subcontractor and TSMC is terminated or amended in a manner detrimental to us, it could
adversely affect our business while we try to make alternative arrangements with
substitute suppliers.

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

The current performance of the
capital markets may significantly decrease the value of our marketable securities and may
cause us to incur impairment charges relating to our investment portfolio.

The
performance of the capital markets affects the values of the funds we hold in marketable
securities. These assets are subject to market fluctuations. Due to recent market
developments, including a series of rating agency downgrades, the fair value of these
investments has declined and may decline in the future.

The
credit and capital markets have continued to deteriorate in 2009. We expect that market
conditions may continue to fluctuate in the foreseeable future and that the fair value of
our investments may be impacted accordingly. The continuing turmoil in the markets may
result in impairments of the carrying value of our investment assets. Realized or
unrealized losses in our investments or in our other financial assets may adversely affect
our financial condition.

As
of December 31, 2008, our marketable securities balance totaled $27.2 million, reflecting
net unrealized losses in the amount of $0.7 million.

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

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

11

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# Risks Relating to Our
Ordinary Shares

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

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

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

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

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

Future
exercises of our options and warrants and vesting of our restricted share units may result
in substantial dilution and future sales of these ordinary shares and shares held by our
principal shareholders may cause the market price of our ordinary shares to decline. We
cannot predict what effect, if any, future sales of our ordinary shares, or the
availability of our ordinary shares for future sale, will have on the market price of our
ordinary shares. Sales of substantial amounts of our ordinary shares in the public
marketplace by us or our shareholders, including our principal shareholders whose shares
were registered in 2008 for resale with the Securities and Exchange Commission, or the
perception that such sales could occur, could adversely affect the market price of our
ordinary shares and may make it more difficult for investors to sell ordinary shares at a
time and price which such investors deem appropriate.

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

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

12

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

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

# Risks Relating To Our
Location In Israel

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

We
are incorporated under the laws of the State of Israel, and our principal executive
offices and principal research and development facilities are located in Israel.
Political, economic and security conditions in Israel directly influence us. Since the
establishment of the State of Israel in 1948, Israel and its Arab neighbors have engaged
in a number of armed conflicts. A state of hostility, varying in degree and intensity, has
led to security and economic problems for Israel. Major hostilities between Israel and its
neighbors may hinder Israels international trade and lead to economic downturn.
This, in turn, could have a material adverse effect on our operations and business. There
has been an increase in unrest and terrorist activity in Israel, which began in September
2000 and which has continued with varying levels of severity through 2008. There were
extensive hostilities along Israels northern border with Lebanon in the summer of
2006. Recently, there was an escalation in violence among Israel, Hamas, the Palestinian
Authority and other groups. Hamas launched hundreds of missiles from the Gaza Strip
against Israeli population centers, which led to an armed conflict between Israel and
Hamas during December 2008 and January 2009. The future effect of this deterioration and
violence on the Israeli economy and our operations is unclear.

Additionally,
some of our key employees in Israel are obligated to perform annual reserve duty in the
Israel Defense Forces and are subject to being called for active military duty at any time
in the event of a national emergency. If a military conflict or war arises, such as the
recent hostilities along Israels border with the Gaza Strip, these individuals could
be required to serve in the military for extended periods of time. Our operations could be
disrupted by the absence for a significant period of one or more of our key employees due
to military service. Any disruption in our operations would harm our business.

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

A
significant portion of the cost of our Israeli operations, mainly personnel costs, is
incurred in NIS. Therefore, our NIS related costs, as expressed in U.S. dollars, are
influenced by the exchange rate between the U.S. dollar and the NIS. During 2007 and the
first half of 2008, the NIS appreciated against the U.S. dollar, which resulted in a
significant increase in the U.S. dollar cost of our operations in Israel. NIS linked
balance sheet items may create foreign exchange gains or losses, depending upon the
relative dollar values of the NIS at the beginning and end of the reporting period,
affecting our net income and earnings per share. Although we may use hedging techniques we
cannot completely eliminate the effects of currency fluctuations. Exchange rate
fluctuations resulting in a devaluation of the U.S. dollar compared to the NIS could have
a material adverse impact on our operating results and share price.

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

Our
facilities in Israel have been granted Approved Enterprise status under the Law for the
Encouragement of Capital Investments, 1959, commonly referred to as the Investment Law.
The Investment Law provides that capital investments in a production facility (or other
eligible assets) may be designated as an Approved Enterprise. Until recently, the
designation required advance approval from the Investment Center of the Israel Ministry of
Industry, Trade and Labor.

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On
April 1, 2005, an amendment to the Investment Law came into effect, which revised the
criteria for investments qualified to receive tax benefits. An eligible investment program
under the amendment will qualify for benefits as a Privileged Enterprise (rather than the
previous terminology of Approved Enterprise). Among other things, the amendment provides
tax benefits to both local and foreign investors and simplifies the approval process. The
amendment does not apply to investment programs approved prior to December 31, 2004 and
applies to new investment programs only. Under the amendment, if we were to pay a dividend
out of the tax-exempt income generated by a Privileged Enterprise under the provisions of
the amended Investment Law during the tax exemption period, a portion of the income that
is equivalent to the amount distributed as dividends will be subject to corporate tax, and
we may be required to record deferred tax liability with respect to such tax-exempt
income. In order to be eligible for tax benefits, we must comply with various conditions,
as well as periodic reporting obligations. If we fail to meet these requirements, we would
be subject to corporate tax in Israel at the regular statutory rate. We could also be
required to refund tax benefits, with interest and adjustments for inflation based on the
Israeli consumer price index. As of December 31, 2008, we did not generate income under
the provisions of the amended Investment Law. See Item 10.E, Taxation  Israeli
Taxation  Law for the Encouragement of Capital Investments, 1959 for more
information about these programs.

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

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

In
recent years, the Government of Israel has reduced the benefits available under these
programs, and these programs may be discontinued or curtailed in the future. If the
Government of Israel discontinues or modifies these programs, or we are unable to comply
with the new requirements, our expenses will increase significantly, and our business,
financial condition and results of operations could be materially and adversely affected.

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

It may be difficult to enforce a
U.S. judgment against us or our officers and directors, to assert U.S. securities laws
claims in Israel or serve process on substantially all of our officers and directors.

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

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The rights and responsibilities of
our shareholders are governed by Israeli law and differ in some respects from the rights
and responsibilities of shareholders under U.S. law.

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

Provisions of Israeli law may
delay, prevent or make difficult a change of control and therefore depress the price of
our shares.

Some
of the provisions of Israeli law could:

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

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

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

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

As a foreign private issuer whose
shares are listed on The NASDAQ Global Market, we may follow certain home country
corporate governance practices instead of certain NASDAQ requirements. We follow Israeli
law and practice instead of NASDAQ rules regarding the director nominations process and
compensation of executive officers.

As
a foreign private issuer whose shares are listed on The NASDAQ Global Market, we are
permitted to follow certain home country corporate governance practices instead of certain
requirements of The NASDAQ Marketplace Rules. We do not comply with NASDAQ requirements
regarding the director nominations process and compensation of executive officers, which
require that director nominees and compensation of executive officers be
selected/determined, or recommended for the board of directors selection/determination,
either by a majority of the independent directors or a committee comprised solely of
independent directors. Instead, we follow Israeli law and practice in accordance with
which our directors are recommended by our board of directors for election by our
shareholders and our board of directors determines executive compensation, subject to the
required approvals under Israeli law. As a foreign private issuer listed on The NASDAQ
Global Market, we may also follow home country practice with regard to, among other
things, composition of the board of directors and quorum at shareholders meetings.
In addition, we may follow our home country law, instead of the NASDAQ Marketplace Rules,
which require that we obtain shareholder approval for certain dilutive events, such as for
the establishment or amendment of certain equity based compensation plans, an issuance
that will result in a change of control of the company, certain transactions other than a
public offering involving issuances of a 20% or more interest in the company and certain
acquisitions of the stock or assets of another company. A foreign private issuer that
elects to follow a home country practice instead of NASDAQ requirements must submit to
NASDAQ in advance a written statement from an independent counsel in such issuers
home country certifying that the issuers practices are not prohibited by the home
countrys laws. In addition, a foreign private issuer must disclose in its annual
reports filed with the Securities and Exchange Commission each such requirement that it
does not follow and describe the home country practice followed by the issuer instead of
any such requirement. Accordingly, our shareholders may not be afforded the same
protection as provided under NASDAQs corporate governance rules.

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|ITEM 4. |  | INFORMATION ON THE COMPANY
|------- |  | --------------------------

|A. | HISTORY
AND DEVELOPMENT OF THE COMPANY
|-- | --------------------------------------

We
were incorporated as a limited liability company under the laws of the State of Israel in
1989 as Dan-Serb Ltd. We changed our name to LanOptics Ltd. in March 1990 and to EZchip
Semiconductor Ltd. on July 22, 2008. Until 1999, our principal business was the
development, manufacture and marketing of solutions and Internet applications to improve
the connectivity and performance of corporate Local Area Networks, or LANs, and Wide Area
Networks, or WANs. In mid-1999, we decided to cease the research and development of new
switching products for LANs and instead, to focus on our internal application-specific
integrated circuit, or ASIC, design team. This team, which had previously developed ASICs
for our LAN and WAN products, began work on the development of network processors. This
new business initiative was incorporated as our subsidiary EZchip Technologies in December
1999.

Our
business now consists exclusively of the business of our EZchip Technologies subsidiary, a
fabless semiconductor company that is engaged in the development and marketing of Ethernet
network processors for networking equipment.. EZchip Technologies provides its customers
with solutions that scale from 1-Gigabit to 100-Gigabit per second with a common
architecture and software across all products. EZchip Technologies network
processors provide the flexibility and integration that enable triple-play data, voice and
video services in access, metro and edge systems that make up the new Carrier Ethernet
networks. We currently own approximately 99% of the outstanding shares of EZchip
Technologies and approximately 89% of EZchip Technologies on a fully diluted basis, taking
into account EZchip Technologies options and shares held by current and former
employees. Our principal executive offices are located at 1 Hatamar Street, P.O. Box 527,
Yokneam 20692 Israel, and our telephone number is +972-4-959-6666. Puglisi &
Associates, located at 859 Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware
19715, serves as our agent for service of process in the United States.

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

# Industry Background

In
recent years there has been a significant increase in the bandwidth demands on
communications networks. These networks have experienced major upsurges in the volume,
variety and complexity of communications traffic. The expansion of broadband access
technologies to residences and businesses, in large part due to growth in Internet usage
and the dramatic increase in communications traffic that consists of digital media, have
created strong demand for greater access bandwidth. To meet this demand, carrier networks
are undergoing significant changes and, most significantly, are migrating to packet-based
Ethernet networks that enable higher throughput, lower cost and uniform technology across
both the access and metro networks. These networks are now being designed to deliver
voice, video and high-speed Internet access, or triple-play services, on one
converged, efficient and flexible network. These trends require network equipment, and
particularly the switches that build the metro Ethernet networks, to comply with evolving
market requirements and to be able to provide new services, better quality of service, or
QoS, and to support new protocols and standards. Programmable network processors, or NPUs,
address these needs.

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

Carrier
network equipment is the primary target for network processors, since the switches,
routers and access nodes that make up the carrier networks are more demanding in features
and performance and are less cost sensitive than enterprise networks. The carrier network
usually consists of three domains, although in some cases there is an overlap between
these domains: (i) the access network, also known as the first mile,
aggregates traffic from individual businesses and residences; (ii) a metro area
network, or MAN, spans a metropolitan area, and interconnects the access networks;
(3) a wide area network, or WAN, interconnects geographically distanced MANs.

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

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

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

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

As
carriers are gradually migrating to Ethernet-based infrastructure the various classes of
equipment that make up the carrier network are migrating to Ethernet-centric platforms,
including CESR and Carrier Ethernet Access Platforms, or CEAP. Vendors of CESR and CEAP
equipment are the primary target customers for our network processors. Other smaller
target markets include data center appliances that perform functions such as security,
load balancing and traffic monitoring and analysis.

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

# Market Trends

CESR
equipment can be designed to incorporate ASICs, which are non-programmable switching
chips, field programmable gate arrays, or FPGAs, high-speed network processors, or NPUs,
or a combination of these. The challenge is to provide an integrated solution that is both
flexible and cost-effective.

Although
ASICs are effective from a cost/performance viewpoint, their lack of programmability is a
severe disadvantage. This makes them inflexible and therefore inadequate to accommodate
todays rapidly changing application environment with evolving requirements to
provide new services, features and network protocols.

FPGAs
are relatively expensive and do not provide the price points that effectively address
carrier network price targets.

High-speed
NPUs are the most suitable for use in CESR equipment because of the 10-Gigabit or higher
throughput they provide. These NPUs typically maximize current silicon technologies to
provide optimal programming flexibility and integration while maintaining high
performance. NPUs are cost effective in light of their advantages. Within the market for
NPUs, there are currently two main classes:

| |  | Access
NPUs  typically with several Gigabit-per-second throughput and used mostly in
access equipment.
| | - | -------------------------------------------------------------------------------------------------------

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

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In
previous years, a third class of mid-range NPUs existed, typically with up to 2.5-Gigabit
throughput and often used in multi-service equipment, such as asynchronous transfer mode,
or ATM, equipment. These NPUs were the first NPUs to hit the market and gain market
traction. Because of the long life-cycles of networking equipment, they are still being
sold in fairly large volume. However they are presently used mostly in legacy networking
equipment and are typically not selected for new designs. Consequently, they will likely
decline in market share over time.

CESR
equipment implements a significant number of NPUs. These products are built in a modular,
multi-slot chassis. Each chassis typically consists of 8-16 line cards, with each line
card consisting of 1-4 NPUs, so that 8-64 NPUs can be typically used for a fully populated
chassis. Of these products, CESRs are the fastest growing, as carriers worldwide are
migrating from older TDM SONET/SDH-based networks to packet Ethernet based networks.

In
the residential and business access space, as packet-based video services increase the
per-user bandwidth requirements, access switches are gradually migrating to support
increasing throughput and more advanced services and represent a growing market
opportunity suitable for higher-speed NPUs.

# Our Solution

We
design and produce network processors for high-speed networking equipment, integrating
several key functions into a single chip. Networking equipment vendors use EZchip
Technologies network processors to form the silicon core of next-generation
networking equipment, such as switches and routers, for voice, video and data integration
in a variety of applications. We are a fabless semiconductor company, which means that we
do not have our own semiconductor manufacturing plant, but rather utilize outside
fabrication facilities.

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

EZchip
Technologies NPUs represent a major advance over earlier generations of network
processor solutions. These earlier solutions required multiple chips to perform the
requisite designed-in functions, placing limitations on the speed at which data could be
processed, the density of ports that could be achieved in a given system and the
associated cost. Moreover, most of these earlier solutions employed generic reduced
instruction set computer, or RISC, processors rather than specially designed processing
engines. EZchip Technologies advance over these earlier designs lies in its
integration of processing, classification and traffic management functions in a single
chip. This is accomplished with patented elements and other proprietary information,
EZchip Technologies Task Optimized Processing technology that uses specialized
processing engines instead of generic RISC engines, chip architecture innovations and
innovative table lookup (search) algorithms. As a result, systems designed using EZchip
Technologies products offer equipment vendors the ability to reduce chip count,
power consumption and cost.

The
architecture and features of our products offer the flexibility, scalability and price
performance that are sought by communications equipment vendors. We offer solutions that
range in throughput from several Gigabit-per-second to 100 Gigabit-per-second with common
architecture. All our network processors are largely software compatible, making it
possible for customers to easily port their network-processor applications among multiple
product families based on our NPUs.

18

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# Products

Network Processor Chips

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

Continuing
with our development of highly integrated products, in December 2003 we introduced the
NP-1c network processor. Like the NP-1, the NP-1c is a single-chip, full-duplex,
10-Gigabit network processor that integrates search engines, yet it offers a significant
increase in performance and cost reduction due to its improved process technology. NP-1c
is essentially an improved and less expensive version of the NP-1 that uses a 0.13-micron
chip manufacturing process and, therefore, we no longer offer the NP-1. In June 2008 we
announced the end-of-life of the NP-1c, with final shipment scheduled to take place during
2009.

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

Whereas
the NP-1c was targeted mainly at service cards in communication applications, typically
with one or two of these cards per chassis, the NP-2 addresses line card applications,
which often have eight or more cards installed per chassis, and stand-alone pizza
box applications.

Since
all the NP-2 models are software compatible and share the same pin arrangement, customers
may modify their NP-2 designs using the different NP-2 models to offer a range of products
at differing price points. The NP-2 product family is also software-compatible with the
NP-1c, making it possible for existing customers to port their network-processor
applications to NP-2.

The
NP-3 is an enhanced version of NP-2, providing a significant increase in throughput. We
have two versions of the NP-3 network processor. The first is a special version developed
jointly with Marvell Technology Group Ltd., or Marvell, for a major networking equipment
vendor, and it sampled in 2007. We developed the second version independently of Marvell
for the general market, and it sampled in 2008. Both versions are now in production. The
NP-3 features greater throughput than the NP-2 through the use of 90nm silicon process,
enhanced table lookup algorithms and faster memory interfaces. It also provides enhanced
traffic management and an integrated offload engine for operations, administration and
maintenance, or OAM, functions which are of great importance in carrier Ethernet
equipment.

Pursuant
to our collaboration with Marvell, Marvell manufactures and sells the customized version
of NP-3 to the customer and pays us a fixed royalty fee that is comparable to the gross
profit we would have generated had we sold the chip directly to that customer. Since we do
not incur any production costs under this model, sales to this customer result in a higher
gross margin.

19

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Evaluation Boards and
Network-processor Based Systems

Although
our primary business is selling network processor chips, we offer systems based on our
network processor. Evaluation systems are usually required by customers to enable them to
test their NPU-based systems. These systems also serve customers that focus and
differentiate themselves through software applications and are in need of high-performance
packet processing hardware platforms for their software applications. The systems we
provide use similar software environments and are different in their form factor:

| |  | NP-3
EZappliance is a stand-alone, self-contained box based on the NP-3.
| | - | ------------------------------------------------------------------------

| |  | EZsystem
is a stand-alone, self-contained box based on the NP-1c and NP-2.
| | - | --------------------------------------------------------------------------

| |  | EZ-ATCA
is based on the NP-2 and follows the Advanced Telecommunications Computing Architecture,
or AdvancedTCA®, and is provided as a blade that can be plugged into an AdvancedTCA
chassis.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Development Software
Toolkits

In
order to facilitate our customers adaptation of our products, we offer toolkits that
assist our customers in creating, verifying and implementing solutions based on our
network processors. These toolkits are used for customers product development based
on all of our network processors.

The
EZdesign toolkit is a comprehensive software development toolset with a graphical user
interface (GUI) for writing, testing and debugging programs for our network processors to
implement a wide range of applications and reduce time to market of next-generation
networking products. It includes a hardware-software simulator, a compiler, debugger and
other utilities. We continually release new versions of the EZdesign toolset, providing
functional enhancements.

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

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

# Future Products

EZchip
Technologies is currently developing our next generation NP-4 highly integrated network
processors, which is scheduled to sample during 2009. This generation of network
processors is based on our core technology used in the NP-1, NP-1c, NP-2 and NP-3, with
the addition of higher throughput, new interfaces and more features.

The
NP-4, a 100-Gigabit NPU, continues with our distinctive high level integration of
functionality into the network processor. NP-4 offers higher throughput than NP-3, and
targets 20-Gigabit ,40-Gigabit and 100-Gigabit line-card and pizza box carrier Ethernet
applications. In addition to its integrated classifiers and traffic managers, the NP-4 is
designed to include Ethernet physical layer transceivers, or PHYs, and for some
applications eliminates the need for a separate fabric interface chip. Integration of
these functions, normally performed by separate chips, will further save our customers
valuable space on their cards while reducing system costs and complexity. We recently
entered into an agreement with Marvell pursuant to which Marvell will be the vendor for
our NP-4 network processor. The NP-4 network processor will also be manufactured by TSMC
(see below in this Item 4.B Information on the Company  Business Overview
 Manufacturing).

20

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In
October 2007, we announced that we are developing a new family of network processors
targeting Ethernet Access applications. Several models of the network processors, named
NPA, will be offered with combinations of 100-Megabit, 1-Gigabit and 10-Gigabit Ethernet
ports with an aggregate throughput of up to 10-Gigabits. This family of access NPUs
applies the technology we developed for our high-speed NPUs to allow building Ethernet
access switching systems.

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

Both
the NP-4 and NPA, which are currently under development, are scheduled to sample during
2009.

# 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). Performance of these functions requires the network processor
device to handle identification, classification and processing tasks simultaneously.

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

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

Other
than the NP-1 and NP-1c, all of our network processors also incorporate integrated traffic
managers for advanced QoS, which is required by increasingly complex networks. After
modification, packets are put in queues that are managed by the traffic manager to control
the priority, bandwidth utilization and scheduling of packets as well as dealing with
congestion scenarios. The traffic management provides QoS for video, voice and data
services in packet-based networks and enables carriers to offer service level agreements,
or SLA, to their customers. By integrating this functionality into our network processors,
the need for our customers to employ a separate traffic management chip is eliminated.

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

# Research and Product
Development

Currently,
84 employees, representing about 72% of our employees, are engaged in research and
development. EZchip Technologies senior executives devote a substantial portion of
their time in communicating with customers to determine what product needs should be
addressed. Our net research and development expenses were approximately $8.4 million in
2006, $8.5 million in 2007 and $13.0 million in 2008. Since April 2006, EZchip
Technologies research and development efforts have been financed, in part, through
grants from the OCS. EZchip Technologies research and development expenses, net of
OCS grants, were approximately $1.0 million in 2006, $2.1 million in 2007 and $3.0 million
in 2008.

21

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# Sales and Marketing

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

In
general, it takes a customer 18 to 24 months to design and bring to market a networking
product based on our network processor chips. During this design phase, the revenues we
recognize are mostly attributable to the sale of evaluation systems and development
software toolkits that our customers use to assist in the development of their own network
processor based products. As customers move to development of their own boards
incorporating our network processor, they purchase sample chips from us for testing
purposes. Once their own designs are completed, customers move into production phase where
they begin to manufacture their products. At this point customers purchase a limited
number of network processors for the initial production stage. Depending upon the
acceptance of their products in the marketplace and the speed of deployment of projects
with them, the customer may or may not increase production. Volume production of a
customers product is expected to translate into volume sales of our network
processors. We have no direct influence upon the sales and marketing of our
customers products.

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

To
facilitate marketing efforts, we have built on our extensive industry exposure through
press, conferences and trade shows and have established sales and support offices in
California and Massachusetts, as well as local support in China. Currently, our sales,
marketing and support staff consists of 15 professionals and administrative personnel.
This sales force consists of persons with technical training and significant experience in
the semiconductor industry. Sales efforts are augmented by the direct involvement of our
senior executives, who work closely with customers to determine product needs. In some
parts of the world our strategy is to work with local marketing channels, including sales
agents, resellers and distributors. These channels are assigned territories of primary
responsibility, with exclusive rights in some cases. We will consider the need for local
sales offices when justified by the circumstances. Our in-house sales and marketing force
and the external marketing channels are also responsible for providing local technical
support. Our marketing activities include:

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

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

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

| |  | communications
on the Internet.
| | - | -------------------------------

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

# Customers and Customer
Support

Most
of our customers are vendors of networking equipment to which we sell directly or through
contract manufacturers or distributors. As of December 31, 2008, we had approximately 171
design wins with customers worldwide, who purchased development kits and started designs
of networking products based on our network processors. Of such design wins, 114 are
already in production and we expect a significant portion of the remaining design wins to
enter production during 2009 and 2010. We do not expect that all of our design wins will
reach production stage, as projects may be halted, delayed or cancelled. In addition,
there is no assurance that products that have reached production will be successfully
accepted in the marketplace.

22

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

| |  | Juniper
Networks, which accounted for approximately 55% of our 2008 revenues, entered production
with NP-2 based products in 2007 and continued to launch additional products that
incorporate our NPUs during 2008. Although we believe Juniper is still in the early
stages of selling platforms that incorporate EZchip NPUs, it is extremely difficult to
predict how the current economic downturn may affect the sales of these products.
Carriers are carefully monitoring their financial performance and capital expenditures,
and they may reduce or defer their capital expenditures on CESR, which would adversely
affect the relevant Juniper product lines.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
second major vendor has selected a customized version of NP-3, developed in collaboration
with Marvell, for its principal CESR platforms. This CESR vendor accounted for a
relatively minor portion of our revenues in 2008 and entered production during the first
quarter of 2009 with platforms that incorporate our customized NP-3 processor developed
in collaboration with Marvell. We therefore expect to see revenue growth from such
customer, although the ramp-up could be slower than expected as a result of current
market conditions. Under this collaboration, Marvell manufactures and sells the chip to
the customer and pays us a royalty that is comparable to the gross profit that we would
have generated had we sold the chip directly to the customer. Since we do not incur any
production costs under this model, sales to such customer result in a higher gross
margin.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

We
offer training courses to provide our customers with a complete understanding of our
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 intense. There are currently four vendors
providing high-speed network processors that target the metro and access switches, and
edge routers: EZchip Technologies, Sandburst Corporation (which was acquired by Broadcom
Corporation in January 2006), Bay Microsystems and Xelerated, Inc. In addition, Broadcom
Corporation, Dune Networks and Marvell have released switch ASICs (non-programmable chips)
that target these market segments as well. Agere Systems Inc. and Wintegra Inc. are
focused on lower speed applications. Our NPA access NPUs compete with NPUs from these
lower speed NPU vendors. Some customers use FPGAs, mainly from Altera Corporation and
Xilinx Inc., to implement packet processing functions and these may be competing solutions
as well. We also experience major competition from customers internal chip design
teams, especially in the CESR segment, who choose to develop their own network processors
or in-house ASIC solutions Some of our competitors or potential competitors are larger,
have significantly greater sales, have greater financial resources and are better known.

23

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We
believe that the principal elements of competition in the market for advanced network
processors are integration, flexibility and price. Integration reduces the chip count
(that is, the number of chips needed in a given application to achieve the system
manufacturers design goals), power usage (that is, the watts of electric power
required to operate the chip) and ultimately the overall price of a system solution.
Flexibility implies ability to address changing market processing requirements through
programming and downloading of new code to the network processor.

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

We
believe EZchip Technologies is the only network processor vendor that currently offers
solutions that range in throughput from a few Gigabit to 100 Gigabit per second, all based
around common architecture and software. Other vendors focus on either the high-speed
segment (over 10-Gigabit per second) or the low speed segment (up to 10-Gigabit per
second).

Most
of our network processor competitors currently-announced products use separate chips
for traffic management or provide lesser flexibility or provide lesser throughput.

When
compared to the non-programmable ASIC solutions, we believe that our network processors
bring flexibility that addresses customers needs to support new applications,
especially in carrier switches and routers, at a reasonable price differential when
compared to the price of ASIC solutions.

FPGAs,
in particular when used for high-speed packet processing solutions, usually provide less
integration of features at a higher cost as compared to network processors.

Our
experience in developing several generations of network processors with integrated traffic
managers, as well as working closely with leading carrier switch/router vendors has
enabled us to develop the expertise and gain deep understanding of our target systems, the
requirements and how they are best addressed. We believe this represents a considerable
barrier of entry for potential competitors.

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

# Intellectual Property
Rights

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

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

24

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

# Manufacturing

While
we engineer and design our products, we do not own or operate a semiconductor fabrication
facility and we do not have the resources to manufacture our products internally.

Our
NP-1c network processors utilize IBMs 0.11-micron Cu-11 ASIC template. IBM also
manufactures our NP-3 line of products using the 90 nanometer process. Taiwan
Semiconductor Manufacturing Co., or TSMC, manufactures our NP-2 line of products using the
0.13 micron process and the special version of our NP-3 NPU, which we developed with
Marvell, and will manufacture our NPA line of products, using the 90 nanometer process. We
work with TSMC through third parties that coordinate and assume responsibility for the
manufacturing process. This fabless manufacturing model enables us to focus on our
engineering and design strengths, minimize fixed costs on capital expenditures and still
have access to high-volume manufacturing capacity.

We
recently entered into an agreement with Marvell pursuant to which Marvell will be the
vendor for our NP-4 network processor. The NP-4 network processor will also be
manufactured by TSMC using the 55 nanometer process. We expect that all of our products
will be single sourced from fabrication facilities and any late delivery or failure to
deliver products could result in delays in satisfying customer demand, increased costs and
loss of revenues.

We
have completed the requirements and have been awarded ISO 9001:2000 certification.

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

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

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

We
do not own any real property. Our principal development, marketing and administrative
facilities occupy approximately 25,000 square feet of a building in Yokneam, Israel, at an
aggregate rental cost of approximately $417,000 in 2008. The lease for our principal
offices expires in January 2014.

EZchip
Technologies, which conducts its sales operations through two locations in the United
States, leases office space in California and Massachusetts under six-month renewable
leases. The aggregate rental cost for the two offices was approximately $80,000 in 2008.

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 $231,000 in 2006,
$309,000 in 2007 and $110,000 in 2008. Our capital expenditures in 2006, 2007 and 2008
were spent primarily for the procurement of research and development hardware equipment
and software tools.

25

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

Not
applicable.

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

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

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

# General

Our
business consists exclusively of the business of our subsidiary, EZchip Technologies Ltd.,
a company engaged in the development and marketing of Ethernet network processors for
networking equipment.

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

Our
consolidated financial statements appearing in this annual report are prepared in U.S.
dollars and in accordance with generally accepted accounting principles in the United
States, or U.S. GAAP.

# Critical Accounting
Policies

The
preparation of financial statements requires us 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, we evaluate our estimates
and judgments. We base our 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.

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

Revenue Recognition

We
generate our revenues mainly from sales of network processor chips and to a lesser extent
from the sales of network-processor based systems, software tools, maintenance and support
services, through EZchip Technologies and its wholly owned subsidiary EZchip Inc.

Revenues
from network processor chips and network processor-based systems are recognized upon
shipment in accordance with Staff Accounting Bulletin No. 104 Revenue Recognition
in Financial Statements, when persuasive evidence of an agreement exists,
delivery of the product has occurred, the fee is fixed or determinable and collectibility
is probable. Generally, we do not have any significant obligations after delivery. We do
not grant a right of return to our customers. In addition, if a sale does not meet all of
the criteria, the sale is deferred until all criteria are met.

26

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

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

During
2006, we signed a collaboration agreement with Marvell. According to the agreement,
Marvell will manufacture and sell the customized version of our NP-3 network processor to
a specified customer and will pay us royalties for each chip it sells to the customer. In
accordance with our agreement with Marvell, Marvell sends us royalty reports once a month,
which reflect its sales in the prior month. Accordingly, we recognize royalty revenue in
the month that follows the month in which the sales are made by Marvell.

Inventory Valuation

We
are required to state our inventories at the lower of cost or market price. In assessing
the ultimate realization of inventories, we are required to make judgments as to future
demand requirements and compare that with the current or committed inventory levels.
Inventory write-offs are provided for slow-moving items or technological obsolescence and
are recorded in the consolidated statements of operations. Once inventory is written down,
a new cost basis is established for future periods.

Goodwill

Goodwill
reflects the excess of the purchase price of an acquired business over the fair value of
net assets acquired. We adopted Statement of Financial Accounting Standards, or SFAS, No.
142, Goodwill and Other Intangible Assets, or SFAS No. 142. Under SFAS No.
142, goodwill is not amortized but instead is tested for impairment at least annually (or
more frequently if impairment indicators arise). We determined December 31 as the date of
the annual impairment test. We operate in one operating segment, and this segment
comprises our only reporting unit. SFAS No. 142 prescribes a two-phase process for
impairment testing of goodwill. The first phase screens for impairment while the second
phase (if necessary) measures impairment. In the first phase of impairment testing,
goodwill attributable to the reporting unit is tested for impairment by comparing the fair
value of the reporting unit with its carrying value. As of December 31, 2008, no instances
of impairment were found.

Equity-based Compensation
Expense

We
account for equity-based compensation in accordance with SFAS No. 123(R),
Share-Based Payment, or SFAS No. 123(R), which requires the measurement and
recognition of compensation expense based on estimated fair values for all stock-based
payment awards made to employees and directors. SFAS No. 123(R) supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or
APB No. 25, for periods beginning in fiscal year 2006. Under the fair value recognition
provisions of this statement, stock-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as an expense over the requisite
service periods. Determining the fair value of stock-based awards at the grant date
requires the exercise of judgment, including the amount of stock-based awards that are
expected to be forfeited. If actual results differ from these estimates, equity-based
compensation expense and our results of operations could be impacted.

We
selected the Black-Scholes-Merton option pricing model as the most appropriate fair value
method for our stock-options awards and account for restricted share units based on the
market value of the underlying shares at the date of grant. The option-pricing model
requires a number of assumptions, of which the most significant are the expected stock
price volatility and the expected option term. Expected volatility was calculated based
upon actual historical stock price movements. The expected life of options granted is
calculated using the simplified method, as defined in Staff Accounting
Bulletin No 107, Share-Based Payments, or SAB 107, as the average between the
vesting period and the contractual life of the options.

27

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On
December 21, 2007 the SEC staff issued Staff Accounting Bulletin No. 110, or SAB 110,
which, effective January 1, 2008, amends and replaces SAB 107. We currently use the
simplified method as adequate historical experience is not available to provide a
reasonable estimate. We adopted SAB 110 effective January 1, 2008 and will continue to
apply the simplified method until enough historical experience is available to provide a
reasonable estimate of the expected term for stock option grants. The risk-free interest
rate is based on the yield from U.S. treasury bonds with an equivalent term to the
expected life of the options. We have historically not paid dividends and do not intend to
pay dividends in the foreseeable future.

With
regard to the fair value of employee stock options in EZchip Technologies granted in
previous years (during fiscal year 2008 we did not grant any awards to purchase shares of
EZchip Technologies), we retained in previous years a third party appraiser to calculate
the ordinary shares fair value. See Note 16b to our consolidated financial statements.

Accounting for Income Tax

We
account for income taxes in accordance with SFAS No.109, Accounting for Income
Taxes, or SFAS No. 109. SFAS No. 109 prescribes the use of the liability method
whereby deferred tax assets and liability account balances are determined based on
differences between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. We provide a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.

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

Marketable Securities

We
account for our investments in marketable securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. We
determine the classification of marketable securities at the time of purchase and
reevaluate such designations as of each balance sheet date. We classify all of our
marketable securities as designated 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 (deficiency), accumulated other comprehensive
income (loss). Realized gains and losses on sales of investments are included in earnings
and are derived using the specific identification basis for determining the cost of
securities. The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discount to maturity. Such amortization together with interest on
securities is included in the financial income (expenses), net.

FASB
Staff Position, or FSP, No. FAS 115-1, and SFAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
provide guidance for determining when an investment is considered impaired, whether
impairment is other-than-temporary, and the measurement of an impairment loss. An
investment is considered impaired if the fair value of the investment is less than its
carrying amount. If, after consideration of all available evidence to evaluate the
realizable value of its investment, impairment is determined to be other-than-temporary,
then an impairment loss should be recognized equal to the difference between the
investments carrying amount and its fair value.

We
review various factors in determining whether we should recognize an impairment charge for
our marketable securities, including our intent and ability to hold the investment for a
period of time sufficient for any anticipated recovery in market value, the length of time
and extent to which the fair value has been less than our cost basis, the credit ratings
of the securities, the nature of underlying collateral, as applicable, and the financial
condition and near-term prospects of the issuer. Based on our consideration of these
factors, our marketable securities were not considered to be other-than-temporarily
impaired at December 31, 2008.

28

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Valuation of Financial
Instruments

Effective
January 1, 2008, we adopted SFAS 157, Fair Value Measurements, and
effective October 10, 2008, we adopted FSP No. FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is NotActive, except
as it applies to the nonfinancial assets and nonfinancial liabilities subject to FSP No.
FAS 157-2. SFAS 157 clarifies that fair value is an exit price, representing the amount
that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in
pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157
establishes a three-tier value hierarchy, as set forth below, which prioritizes the inputs
used in the valuation methodologies in measuring fair value:

| |  | Level
1  Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in  active markets.
| | - | ---------------------------------------------------------------------------------------------------------------------------

| |  | Level
2  Include other inputs that are directly or indirectly observable in the
marketplace.
| | - | ---------------------------------------------------------------------------------------------

| |  | Level
3  Unobservable inputs which are supported by little or no market activity.
| | - | ----------------------------------------------------------------------------------

The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.

The
actual value at which such securities could actually be sold or settled with a willing
buyer or seller may differ from such estimated fair values depending on a number of
factors, including, but not limited to, current and future economic conditions, the
quantity sold or settled, the presence of an active market and the availability of a
willing buyer or seller.

# Results of Operations

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

| |                                                           | Year Ended December 31,
| | --------------------------------------------------------- | -----------------------
|
|
|
|
| | Revenues                                                  |                        
| | Costs of revenues                                         |                        
| | Amortization of existing technology                       |                        
| |                                                           |                        
| | Gross profit                                              |                        
| | Operating expenses:                                       |                        
| | Research and development, net                             |                        
| | In-process research and development charge                |                        
| | Sales, general and administrative                         |                        
| |                                                           |                        
| | Total operating expenses                                  |                        
| |                                                           |                        
| | Operating loss                                            |                        
| | Financial income (expenses), net                          |                        
| |                                                           |                        
| | Loss from continuing operations before minority interest. |                        
| | Minority interest in losses of EZchip Technologies        |                        
| |                                                           |                        
| | Net loss basic and diluted                                |                        
| | Net loss per share (basic and diluted)                    |                        

29

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# Year Ended December 31,
2008 Compared with Year Ended December 31, 2007

Revenues

We
generate our revenues mainly from sales of network processor chips and to a lesser extent
from the sales of network processor-based systems, software tools and services. For the
year ended December 31, 2008, revenues increased by $14.1 million, or 72%, to $33.6
million from $19.5 million in the year ended December 31, 2007. Revenues from sales of
NP-2 and NP-3 network processor chips (including network processor-based systems)
increased by $13.5 million, or 91%, to $28.3 million in the year ended December 31, 2008
from $14.8 million in the year ended December 31, 2007. The increase in NP-2 and NP-3
revenues is mainly the result of several of our customers (primarily Juniper Networks)
entering into the volume production stage for networking products incorporating our NP-2
processor, and to a lesser extent due to revenues from NP-3 pre-production that commenced
during 2008. Revenues from sales of our NP-1c network processor chips (including network
processor-based systems) increased by $0.9 million, or 26%, to $4.5 million in the year
ended December 31, 2008 from $3.6 million in the year ended December 31, 2007. The
increase in NP-1c orders is primarily attributed to end-of-life orders received from major
NP-1c customers following our companys announcement of NP-1c end-of-life during
2009.

Cost of Revenues

Cost
of revenues consists primarily of the cost of network processor chips purchased from our
contract manufacturers and to a lesser extent from the cost of network processor-based
systems, labor costs and other supply chain management and facilities related costs. For
the year ended December 31, 2008, our cost of revenues increased by $4.0 million, or 49%,
to $12.0 million (36% of revenues) from $8.0 million (41% of revenues) in the year ended
December 31, 2007. The increase in cost of revenues is the result of the increase in the
sale of network processor chips and network processor-based systems. The decrease in cost
of revenues as a percentage of revenues is primarily the result of the increased volume
production orders from our contract manufacturer (primarily reflecting the increase in
sales of NP-2 network processor chips) characterized by lower unit prices, as well as from
a favorable customer and product mix.

Amortization of Existing
Technology

Amortization
of existing technology reflects the amortized cost of the intangible asset 
existing technology -acquired in connection with the purchases of EZchip
Technologies shares in the share exchange transactions (as described below under Item 5B.,
Operating and Financial Review and Prospects  Liquidity and Capital
Resources and in Notes 3 and 10 to our consolidated financial statements). Each of
the EZchip Technologies share acquisitions was accounted for according to the purchase
method of accounting, in accordance with SFAS No. 141, and accordingly, the respective
purchase price was allocated to the assets acquired and liabilities assumed based upon
their estimated fair values at the respective dates of acquisition. Existing technology is
amortized using the straight-line method over its useful life, which is up to four years.
For the year ended December 31, 2008, amortization of existing technology increased by
$0.9 million, or 72%, to $2.1 million from $1.2 million in the year ended December 31,
2007. This increase resulted mainly from the January 2008 share exchange transaction,
which increased the existing technology asset in our balance sheet by $4.0 million and
resulted in increased amortization cost during 2008.

Gross Profit

For
the year ended December 31, 2008, gross profit increased by $9.3 million, or 90%, to $19.5
million (58% of revenues) from $10.2 million (53% of revenues) in the year ended December
31, 2007, primarily as a result of the increase in revenues. The increase in gross profit
as a percentage of revenues is primarily the result of the increased volume production
orders from our contract manufactures characterized by lower unit prices, as well as from
a favorable customer and product mix.

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Research and Development
Expenses, Net

Research
and development expenses consist primarily of the salary and benefits of engineers and
costs related to external engineering design services (non-recurring engineering costs).
The reported figures consist entirely of EZchip Technologies research and
development costs. Since April 1, 2006, we have received research and development
participation grants from the OCS. For the year ended December 31, 2008, research and
development costs increased by $5.3 million, or 50%, to $16.0 million (excluding OCS
grants of $3.0 million) from $10.7 million (excluding OCS grants of $2.1 million) in the
year ended December 31, 2007. This increase is attributable primarily to increased labor
costs in the 2008 period (resulting from an increase in the number of our research and
development personnel, an increase in the average labor cost per employee, a higher level
of equity based compensation under SFAS No. 123(R) and the devaluation of the U.S. dollar
compared to the NIS, which increased the U.S. dollar value of our NIS denominated costs),
as well as to substantially higher non-recurring engineering costs related to the
development of our NP-3 and NPA network processors.

In-Process Research and
Development Charge

We
recorded in-process research and development charges in the amounts of $5.1 million in the
year ended December 31, 2008 and $0.4 million in the year ended December 31, 2007 in
connection with our purchases of EZchip Technologies shares in January 2008 and
September 2007, respectively. See Note 3 to the consolidated financial statements.

Sales, General and
Administrative Expenses

Sales,
general and administrative expenses consist primarily of salaries, commissions to third
party sales representatives, participation in trade shows and travel expenses, as well as
legal, accounting and other services and administrative costs. For the year ended December
31, 2008, these expenses increased by $1.6 million, or 26%, to $7.5 million from $5.9
million in the year ended December 31, 2007. This increase is attributable primarily to
(i) higher labor costs (resulting from an increase in the number of sales and marketing
personnel, an increase in the average labor cost per employee, a higher level of
equity-based compensation under SFAS No. 123(R) and the devaluation of the U.S. dollar
compared to the NIS, which increased the U.S. dollar value of our NIS denominated costs),
(ii) amortization of intangible asset created in the January 2008 EZchip Technologies
share exchange transaction, and (iii) a generally higher level of marketing expenses,
sales commissions, legal, accounting and other administrative costs, associated mainly
with the growth of our business.

Financial Income
(Expenses), Net

Financial
income (expenses), net reflects the income or expenses from traditional interest income or
financing expenses and from exchange rate fluctuations and currency translation. For the
year ended December 31, 2008, net financial income increased by $1.3 million to $1.4
million from net financial income of $0.1 million for the year ended December 31, 2007.
This increase is attributable mainly to a long-term loan that was fully repaid in October
2007 resulting in substantially lower interest and amortization expenses in the 2008
period. In addition, in 2008 we recorded significantly higher interest income resulting
from higher cash balances in the 2008 period.

Minority Interest in
Losses of EZchip Technologies

Minority
interest in losses of EZchip Technologies reflects the share of EZchip Technologies
minority shareholders in EZchip Technologies loss. The amounts of $37,000 and
$445,000 represent proceeds received during 2008 and 2007, respectively, from the exercise
of options to purchase ordinary shares of EZchip Technologies.

31

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

Revenues

For
the year ended December 31, 2007, revenues increased by $11.0 million, or 130%, to $19.5
million from $8.5 million in the year ended December 31, 2006. Revenues from sales of
network processor chips (including network processor-based systems) increased by $10.5
million, or 133%, to $18.4 million in the year ended December 31, 2007 from $7.9 million
in the year ended December 31, 2006. The increase in revenues is primarily attributable to
increased NP-2 purchases by a few customers that entered into their production stage for
networking products incorporating our network processor chips.

Revenues
from sales of NP-2 network processor chips (including network processor-based systems)
increased by $10.2 million, or 223%, to $14.8 million in the year ended December 31, 2007
from $4.6 million in the year ended December 31, 2006. The increase is as a result of
several of our customers (primarily Juniper Networks) entering into the volume production
stage for networking products incorporating the NP-2 processor. Revenues from sales of our
NP-1c network processor chips (including network processor-based systems) increased by
$276,000, or 8%, to $3.6 million in the year ended December 31, 2007 from $3.3 million in
the year ended December 31, 2006.

Cost of Revenues

For
the year ended December 31, 2007, our cost of revenues increased by $4.4 million, or 119%,
to $8.0 million (41% of revenues) from $3.7 million (43% of revenues) in the year ended
December 31, 2006. The increase in cost of revenues is primarily as a result of the
increase in the sale of network processor chips and network processor-based systems.

Cost
of revenues attributable to the sale of network processor chips and network
processor-based systems increased by $3.9 million, or 123%, to $7.1 million (37% of
revenues) in the year ended December 31, 2007 from $3.2 million (38% of revenues) in the
year ended December 31, 2006, primarily reflecting the increase in sales of NP-2 network
processor chips. The decrease in cost of revenues as a percentage of revenues is primarily
the result of the increased volume production orders from our contract manufacturer,
characterized by lower unit prices.

Amortization of Existing
Technology

For
the year ended December 31, 2007, amortization of existing technology increased by $0.8
million, or 236%, to $1.2 million from $0.4 million in the year ended December 31, 2006.
This increase resulted mainly from the EZchip Technologies share exchange transaction
completed in December 2006, which increased the existing technology asset in our balance
sheet by $2.8 million and resulted in increased amortization cost during 2007.

Gross Profit

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

Research and Development
Expenses, Net

For
the year ended December 31, 2007, research and development costs increased by $1.2
million, or 13%, to $10.7 million (excluding OCS grants of $2.1 million) from $9.4 million
(excluding OCS grants of $1.0 million) in the year ended December 31, 2006. This increase
is attributable primarily to higher labor costs in the 2007 period, resulting from an
increase in the number of our research and development personnel (from 72 persons at the
end of 2006 to 81 persons at the end of 2007), combined with an increase in the average
labor cost per employee and a higher level of equity based compensation under SFAS No.
123(R), which were partially offset by significantly lower non-recurring engineering costs
in 2007 compared to 2006.

32

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In-Process Research and
Development Charge

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

Sales, General and
Administrative Expenses

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

Financial Income (Expenses), Net

For
the year ended December 31, 2007, net financial income increased by $2.3 million, or 103%,
to $71,000 from net financial expenses of $2.2 million for the year ended December 31,
2006. This increase is primarily attributable to the accretion of $2.7 million to the
redemption value of the EZchip Technologies Redeemable Preferred Shares in 2006. In
December 2006, we acquired additional preferred shares of EZchip Technologies resulting in
our owning the majority of the EZchip Technologies Series C Redeemable Preferred Shares.
As a result, a redemption demand cannot be delivered without our consent and we therefore
ceased to record any interest expense in our consolidated financial statements. As of
January 22, 2008, we own all of EZchip Technologies outstanding Redeemable Preferred
Shares. See Note 20 to the consolidated financial statements.

Minority Interest in
Losses of EZchip Technologies

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

Effective Corporate Tax
Rate

Israeli
companies were subject to corporate tax at the rate of 27% of their taxable income in
2008. The corporate tax rate was further reduced to 26% in 2009 and will be further
reduced to 25% in 2010 and thereafter. However, because we have elected to participate in
the alternative package of tax benefits for our current approved enterprise, the income
derived from that enterprise will be exempt from Israeli corporate tax for a specified
benefit period (except to the extent that dividends are distributed during the
tax-exemption period other than upon liquidation) and subject to reduced corporate tax
rates for an additional period. The period of tax benefits for EZchip Technologies
approved enterprise is valid for ten years following the first year in which the company
generated net income associated with the approved enterprise. Certain investment income
derived by EZchip Technologies from investments may not be regarded by the Israeli tax
authorities as income from its approved enterprise or privileged enterprise and
consequently may be taxed at the regular statutory rate in Israel. As of December 31,
2008, EZchip Technologies did not generate any tax-exempt income from its approved
enterprise and privileged enterprise. See Item 10.E, Taxation  Israeli
Taxation  Law for the Encouragement of Capital Investments, 1959 for more
information about these programs.

We
and EZchip Technologies have operating tax loss carryforwards resulting from the years up
to and including 2008 of approximately $80.1million, which may be carried forward
indefinitely.

EZchip
Inc. is subject to U.S. income taxes and has operating tax loss carryforwards resulting
from the years up to and including 2008 of approximately $3.1 million.

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

33

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We
and EZchip Technologies have accumulated capital loss carryforwards in the amount of $28.5
million.

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

Our Location in Israel

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

Impact of Currency
Fluctuation

A
significant portion of the cost of our Israeli operations, mainly personnel costs, is
incurred in NIS. Therefore, our NIS related costs, as expressed in U.S. dollars, are
influenced by the exchange rate between the U.S. dollar and the NIS. During 2007, the NIS
appreciated against the U.S. dollar, which resulted in a significant increase in the U.S.
dollar cost of our operations in Israel. Such trend continued during the first three
quarters of 2008. The U.S. dollar began to recover during the fourth quarter of 2008 and
further appreciated against the NIS during the first three months of 2009. Also, NIS
linked balance sheet items may create foreign exchange gains or losses, depending upon the
relative dollar values of the NIS at the beginning and end of the reporting period,
affecting our net income and earnings per share. Although we use hedging techniques, we
cannot eliminate the effects of currency fluctuations. Exchange rate fluctuations
resulting in a devaluation of the U.S. dollar compared to the NIS could have a material
adverse impact on our operating results and share price. The caption Financial
income (expenses), net in our consolidated financial statements includes the impact
of these factors as well as traditional interest income or expense. See Note 20 to our
consolidated financial statements. See also discussion in Item 11, Quantitative and
Qualitative Disclosures About Market Risk.

Seasonality

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

Recently Issued
Accounting Standards

See
Note 2w to our consolidated financial statements.

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

Historically
we have satisfied our financial requirements primarily through equity investments, funds
provided by operations and research and development grants. Until 2006, EZchip
Technologies research and development was funded through the proceeds of third party
investments, combined with contributions from our company. Since April 2006, EZchip
Technologies research and development efforts have been financed, in part, through
grants from the OCS.

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

34

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

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

Working
Capital; Cash, Cash Equivalents and Marketable Securities. As of December 31, 2008, we
had $52.6 million in working capital and $48.1 million in cash, cash equivalents and
marketable securities, compared to $46.0 million in working capital and $42.6 million in
cash, cash equivalent and marketable securities as of December 31, 2007 and $19.4 million
in working capital and $17.6 million in cash, cash equivalents and marketable securities
as of December 31, 2006.

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

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

Net cash
provided by operating activities was approximately $6.2 million for the year ended
December 31, 2008 compared with net cash used in operating activities of approximately
$1.1 million for the year ended December 31, 2007 and $7.1 million for the year ended
December 31, 2006. The improvement in cash flows from operating activities in 2008 and
2007 resulted from the increase in revenues during 2007 (130% over 2006) and 2008 (72%
over 2007), while cash related operating expenses in 2007 remained at a constant rate
compared to 2006 and in 2008 moderately increased compared to 2007. There was no material
change in the mix or type of expenses used in operating activities during 2006 through
2008.

Net
cash used in investing activities was approximately $16.8 million for the year ended
December 31, 2008. Of such amount, approximately $16.7 million, net was used to purchase
marketable securities and approximately $0.1 million was used to purchase property and
equipment. Net cash used in investing activities was approximately $5.9 million for the
year ended December 31, 2007. Of such amount, approximately $5.6 million net was used to
purchase marketable securities and approximately $0.3 million was used to purchase
property and equipment. Net cash used in investing activities was approximately $0.2
million for the year ended December 31, 2006, primarily attributable to purchases of
property and equipment.

For
the year ended December 31, 2008, net cash provided by financing activities was
approximately $8,000. This amount is attributable to proceeds of $40,000 from the exercise
of employees stock options, offset in part by approximately $32,000 of expenses
related to share issuance. For the year ended December 31, 2007, net cash provided by
financing activities was approximately $26.3 million. This amount is attributable to
proceeds of approximately $25.6 million from our August and September 2007 public
offerings (after the contemporaneous purchase of EZchip Technologies shares issued
upon exercise of EZchip Technologies employee stock options), approximately $4.7 million
generated from the exercise of employee stock options, offset in part by repayment of a
$4.0 million long term loan. Net cash provided by financing activities was approximately
$5.4 million for the year ended December 31, 2006. This amount is attributable to proceeds
of $1.4 million from the exercise of stock options and proceeds of $4 million from a
long-term loan.

35

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We
believe that our unused cash, cash equivalents and marketable securities balances will
provide sufficient cash resources to finance our operations at least through the next 12
months.

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

Currently,
84 employees, representing about 72% of our employees, are engaged in research and
development. EZchip Technologies senior executives devote a substantial portion of
their time in communicating with customers to determine what product needs should be
addressed.

Since
April 2006, our research and development efforts have been financed, in part, through
grants from the OCS. The following table sets forth our research and development expenses
for the periods indicated:

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

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

We
hold four U.S. registered patents:

| | 1. | No.
          6,532,457: Look-ahead tree structure
| | -- | --------------------------------------------------

| | 2. | No.
6,594,655: Wildcards in radix search tree structures.
| | -- | ---------------------------------------------------------

| | 3. | No.
6,625,612: Deterministic search algorithm.
| | -- | ----------------------------------------------

| | 4. | No.
6,778,534: High-performance network processor.
| | -- | --------------------------------------------------

These
patents may not provide any meaningful protection or commercial advantage to us, as they
may not be of sufficient scope or strength, or may not be issued in all countries where
our products can be sold.

36

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

Our
2008 revenues increased 72% to $33.6 million, up from $19.5 million in 2007. This increase
in revenues is primarily attributable to increased purchases by a limited number of large
NP-2 customers who entered the production stage for networking products that incorporate
our network processor chips. Combined sales of NP-2 and NP-3 products accounted for 85% of
our 2008 revenues; NP-1 products contributed an additional 13%; and the remaining 2%
resulted primarily from the sale of software tools and services.

Two
major tier-1 CESR vendors are building several of their CESR platforms incorporating
EZchip Technologies network processors.

| |  | Juniper
Networks, which accounted for approximately 55% of our 2008 revenues, entered production
with NP-2 based products in 2007 and continued to launch additional products that
incorporate our NPUs during 2008. Although we believe Juniper is still in the early
stages of selling platforms that incorporate EZchip NPUs, it is extremely difficult to
predict how the current economic downturn may affect the sales of these products.
Carriers are carefully monitoring their financial performance and capital expenditures,
and they may reduce or defer their capital expenditures on CESR, which would adversely
affect the relevant Juniper product lines.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
second major vendor has selected a customized version of NP-3, developed in collaboration
with Marvell, for its principal CESR platforms. This CESR vendor accounted for a
relatively minor portion of our revenues in 2008 and entered production during the first
quarter of 2009 with platforms that incorporate our customized NP-3 processor developed
in collaboration with Marvell. We therefore expect to see revenue growth from such
customer, although the ramp-up could be slower than expected as a result of current
market conditions. Under this collaboration, Marvell manufactures and sells the chip to
the customer and pays us a royalty that is comparable to the gross profit that we would
have generated had we sold the chip directly to the customer. Since we do not incur any
production costs under this model, sales to such customer result in a higher gross
margin.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
of December 31, 2008, we had a total of 171 design wins, of which 114 were in production.
The remaining 57 design wins are in the product development phase, and we expect a
significant portion of them to enter production during 2009. Typically, a relatively small
percentage of the design wins, which come from our large customers, are likely to account
for a large percentage of our revenues.

Our
chips are incorporated into communication equipment with lengthy design and development
cycles, resulting in an average of approximately two years from design win to initial
production of the equipment. Volume orders can be expected only after the customer enters
into volume production of the equipment, which may take an additional year. Consequently,
we have not yet realized the potential of our design wins and our quarterly revenues may
fluctuate significantly. We do not expect that all of our design wins will reach
production stage, as projects may be halted, delayed or cancelled. In addition, there is
no assurance that products that have reached production will be successfully accepted in
the marketplace. Our future revenue ramp-up will continue to depend on our customers
successful development of new products that incorporate our network processors, on market
acceptance of these products, on the continued growth of the telecommunications and
related markets and on the recovery of the global economy.

See
also discussion in Item 5A Operating Results and Financial Review and Prospects
 Operating Results.

|E. | OFF-BALANCE
SHEET ARRANGEMENTS
|-- | ------------------------------

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

37

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|F. | TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|-- | ---------------------------------------------

The
following table summarizes our material contractual obligations as of December 31, 2008:

| |                                   |  | Payments due by period
| | --------------------------------- |  | ----------------------
|
|
|
|
| | Operating lease obligations       |  |                       
| | Uncertain income tax position (1) |  |                       
| |                                   |  |                       
| | Severance pay (2)                 |  |                       
| |                                   |  |                       
| | Total                             |  |                       

| | 
| | 

| | (1) | Uncertain
income tax position under FASB Interpretation No. 48,           Accounting for
Uncertainty in Income Taxes, or FIN 48, is           due upon settlement and
we are unable to reasonably estimate the ultimate amount           or timing of
settlement. See Note 17a to our consolidated financial statements           for further
information regarding our liability under FIN 48.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Severance
pay relates to accrued severance obligations to our Israeli employees           as
required under Israeli labor law. These obligations are payable only upon
          termination, retirement or death of the respective employee and there is no
          obligation if the employee voluntarily resigns. Of this amount, $0.9 million is
          unfunded.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | Name                         | Age |  | Position(s)                                                           
| | ---------------------------- | --- |  | ----------------------------------------------------------------------
|
|
|
|
| | Benny Hanigal                | 59  |  | Chairman of the Board                                                 
| | Eli Fruchter(1)              | 53  |  | Director, President and Chief Executive Officer of EZchip Technologies
| | Dror Israel                  | 40  |  | Chief Financial Officer                                               
| | Amir Eyal                    | 49  |  | Vice President - Business Development of EZchip Technologies          
| | Ran Giladi (2)               | 54  |  | Director                                                              
| | Karen Sarid (2)(3)           | 58  |  | Director                                                              
| | Shai Saul (2)(3)(4)          | 47  |  | Director                                                              
| | David Schlachet (1)(2)(3)(4) | 63  |  | Director                                                              

| | 
| | 

| | (1) | Member
of our Risk Management Committee.
| | --- | ----------------------------------------

| | (2) | Independent
Director under rules of the Securities and Exchange           Commission and NASDAQ
Marketplace Rules (see explanation below)
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------

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

| | (4) | Outside
Director within the meaning of the Israeli Companies Law           (see explanation
below)
| | --- | ----------------------------------------------------------------------------------------------------

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

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

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

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

Prof.
          Ran Giladi has served as a director of our company since December
          2001.  Prof. Giladi is a faculty member of Ben-Gurion University of the
          Negev, Beersheba, where he founded and was the Head of the Department of
          Communication Systems Engineering from 1992 until 2000.  Prof. Giladi was
          the active Chairman of DiskSites, Inc., which was acquired by Expand Networks
          Ltd. in 2006.  Prof. Giladi co-founded InfoCyclone Inc., which produces
          storage appliances for owners of massively accessed repositories and of which
he           was President and Chief Executive Officer from 2000 until 2002. Prof. Giladi
          co-founded Ramir Ltd., which was later acquired by Harris-Adacom, and served as
          Vice President Research & Development in both companies from 1984 until
          1986.  His research interests include computer and communications systems
          performance, data networks and communications, and network management systems.
          Prof. Giladi holds a B.Sc. degree in Physics and M.Sc. degree in Biomedical
          Engineering, both from the Technion  Israel Institute of Technology, and
a           Ph.D. in Computers and Information Systems from Tel-Aviv University.

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

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

39

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David
Schlachet  has served as director of our company since September 2005 and is
a member of our audit committee. Mr. Schlachet served as chief executive officer of
Syneron Medical Ltd. from November 2005 to May 2007, after having served as chief
financial officer of Syneron Medical Ltd. from July 2004 to November 2005. From January
2000 to June 2004, Mr. Schlachet served as Managing Partner of Biocom, a venture capital
fund specializing in life sciences. From 1995 to 2000, Mr. Schlachet served as a senior
Vice President and Chief Financial Officer of Strauss Elite Holdings, a packaged food
group. Mr. Schlachet also served as an active Chairman of Elite Industries Ltd. From 1988
to 1995, Mr. Schlachet served first as Chief Executive Officer of Yeda, the Weizmann
Institute technology transfer company, and later as Vice President of Finance and
Administration of the Weizmann Institute of Science. Mr. Schlachet serves as a director of
Syneron Medical Ltd., a NASDAQ-listed company, and is a director of Adgar Investment and
Development Ltd., Mazor Surgical Technology Ltd. and Taya Investment Company Ltd., which
are traded on the Tel Aviv Stock Exchange. Mr. Schlachet also serves as a director and
audit committee member of the Tel Aviv Stock Exchange and two private startup companies.
Mr. Schlachet holds a B.Sc. degree in chemical engineering and an M.B.A. from Tel-Aviv
University.

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

|B. | COMPENSATION
OF DIRECTORS AND OFFICERS
|-- | --------------------------------------

The
aggregate amount of compensation paid during 2008 to all of our directors and executive
officers as a group (eight persons) for services in all capacities was approximately
$643,000. This amount does not include expenses we incurred for other payments, including
dues for professional and business associations, business travel and other expenses and
benefits commonly reimbursed or paid by companies in Israel. The aggregate amount set
aside or accrued during 2008 to provide pension, retirement or similar benefits for
directors and officers of our company, pursuant to any existing plan provided or
contributed to by us, was approximately $48,000. All our executive officers work full time
for us.

During
the year ended December 31, 2008, we paid each of our outside directors approximately
$1,700 per quarter and approximately $360 per meeting attended. Our other directors did
not receive any cash compensation during 2008. Effective as of January 1, 2008, we pay a
$3,000 monthly fee to Mr. Benny Hanigal in connection with his service as Chairman of our
Board of Directors. Prior to that date and from December 2006, Mr. Hanigal was paid the
same monthly amount for his service as Chairman of the Board of Directors of EZchip
Technologies.

During
2008, we granted our directors and executive officers as a group options to purchase an
aggregate of 436,600 ordinary shares, with a weighted average exercise price of $14.2 that
expire in 2015, all of which were granted under our 2003 Amended and Restated Equity
Incentive Plan. See Item 6E. Directors, Senior Management and Employees  Share
Ownership  Equity Incentive Plans.

We
follow Israeli law and practice, instead of the NASDAQ Marketplace requirements, regarding
the compensation of our executive officers. See Item 16G. Corporate
Governance.

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

# Election of Directors

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

Our
directors, other than our outside directors, as described below, are appointed by our
shareholders at our annual general meeting and hold office until the next annual general
meeting. Our annual general meetings are held at least once every calendar year, but not
more than 15 months after the last preceding annual general meeting. In the intervals
between our annual general meetings, the board of directors may appoint new directors to
fill vacancies. Our officers serve at the discretion of the board of directors, subject to
the terms of any agreement between them and us and the provisions of the Israeli Companies
Law.

40

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We
do not follow the requirements of the NASDAQ Marketplace Rules with regard to the
nomination process of directors, and instead, we follow Israeli law and practice, in
accordance with which our directors are recommended by our board of directors for election
by our shareholders. See Item 16G. Corporate Governance.

# Alternate Directors

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

# Outside and Independent
Directors

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

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

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

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

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

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

Messrs.
          Shai Saul and David Schlachet serve as our outside directors under the Israeli
          Companies Law. Mr. Sauls term will expire in November 2009 and Mr.
          Schlachets term will expire in July 2011, following which their service
as           an outside director may each be extended for additional three-year terms.

41

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

Pursuant
to a recent amendment to the Israeli Companies Law, an Israeli company whose shares are
publicly traded, may elect to adopt a provision in its articles of association pursuant to
which a majority of its board of directors will constitute individuals complying with
certain independence criteria prescribed by the Israeli Companies Law. We have not
included such a provision in our articles of association since our board of directors
complies with the independent director requirements of the NASDAQ Marketplace Rules
described above.

# Audit Committee

The
Israeli Companies Law requires public companies to appoint an audit committee. An audit
committee must consist of at least three directors including all of the outside directors.
The chairman of the board of directors, any director employed by or otherwise providing
services to the company, and a controlling shareholder or any relative of a controlling
shareholder may not be a member of the audit committee. The responsibilities of the audit
committee include identifying irregularities in the management of the companys
business and approving related party transactions as required by law. Under Israeli law,
an audit committee may not approve an action or a transaction with a controlling
shareholder, or with an office holder, unless at the time of approval two outside
directors are serving as members of the audit committee and at least one of the outside
directors was present at the meeting in which an approval was granted.

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

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

# Risk Management Committee

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

# Internal Auditor

The
Israeli Companies Law also requires the board of directors of a public company to appoint
an internal auditor nominated by the audit committee. The internal auditor may be an
employee of ours, but may not be an interested party or office holder, or a relative of
any interested party or office holder, and may not be a member of our independent
accounting firm or its representative. The role of the internal auditor is to examine,
among other things, the compliance of the companys conduct with applicable law and
orderly business practice. Fahn Kanne Control Management Ltd., a member of the Grant
Thornton network, serves as our internal auditor.

# Directors Service
Contracts

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

42

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

# Fiduciary Duties;
Approval of Certain Transactions

Fiduciary
Duties. The Israeli Companies Law codifies the fiduciary duties that office holders,
including directors and executive officers, owe to a company. An office holders
fiduciary duties consist of a duty of care and a duty of loyalty.

Duty
of loyalty. The duty of loyalty requires an office holder to act in good faith and for
the benefit of the company, including to avoid any conflict of interest between the office
holders position in the company and such persons personal affairs, avoiding
any competition with the company, avoiding exploiting any corporate opportunity of the
company in order to receive personal advantage for such person or others, and revealing to
the company any information or documents relating to the companys affairs which the
office holder has received due to his or her position as an office holder. A company may
approve any of the acts mentioned above provided that all the following conditions apply:
the office holder acted in good faith and neither the act nor the approval of the act
prejudices the good of the company and, the office holder disclosed the essence of his
personal interest in the act, including any substantial fact or document, a reasonable
time before the date for discussion of the approval.

Duty
of care. The duty of care requires an office holder to act with a level of care that a
reasonable office holder in the same position would employ under the same circumstances.
This includes the duty to use reasonable means to obtain information regarding the
advisability of a given action submitted for his or her approval or performed by virtue of
his or her position and all other relevant information material to these actions. Under
the Israeli Companies Law, all arrangements as to compensation of office holders who are
not directors require approval of the board of directors unless the articles of
association provide otherwise. Arrangements regarding the compensation of directors also
require audit committee and shareholder approval.

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

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

The
office holder must make the disclosure of his personal interest no later than the first
meeting of the companys board of directors that discusses the particular
transaction. This duty does not apply to the personal interest of a relative of the office
holder in a transaction unless it is an extraordinary transaction. An
extraordinary transaction is defined as a transaction not in the ordinary course of
business, a transaction that is not on market terms, or a transaction that is likely to
have a material impact on the companys profitability, assets or liabilities, and a
relative as a spouse, sibling, parent, grandparent, descendent, spouses
descendant and the spouse of any of the foregoing.

43

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

Duties
of shareholders. The Israeli Companies Law applies the same disclosure requirements to
a controlling shareholder of a public company, which includes a shareholder that holds 25%
or more of the voting rights if no other shareholder owns more than 50% of the voting
rights in the company. Two or more shareholders with a personal interest in the approval
of the same transaction are deemed to be one shareholder.

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

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

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

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

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

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

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

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

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

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

| |  | approval
of related party transactions that require shareholder approval.
| | - | -------------------------------------------------------------------------

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

44

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# Indemnification of
Directors and Officers; Limitations on Liability

Indemnification of Office
Holders

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

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

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

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

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

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

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

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

Insurance of Office
Holders

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

Exculpation of Office
Holders

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

Limitations on
Exculpation, Insurance and Indemnification

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

45

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

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

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

As
of March 30, 2009, we had 116 employees. The following table presents the number of our
employees categorized by activity as of December 31:

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

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

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

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

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

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

46

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Pursuant
to Israeli law, we are legally required to pay severance benefits upon certain
circumstances, including the retirement or death of an employee or the termination of
employment of an employee without due cause. All of our Israeli employees are covered by
life and/or pension insurance policies providing customary benefits to employees,
including retirement and severance benefits. Pursuant to an order issued in December 2007
by the Israeli Minister of Industry, Trade and Labor, new provisions relating to pension
arrangements in the collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (the
Israeli federation of employers organizations) apply to all employees in Israel,
including our Israeli employees. According to such provisions, all employees employed for
at least six months are entitled to pension benefits to be funded by preset monthly
contributions of the employee and the employer. We contribute 13.3% of base wages to such
plans and employees contribute between 5.0% to 7% of their base wages. We also contribute
7.5% of base wages to certain professional advancement funds for our employees
and they contribute 2.5% of base wages. Our contribution is limited to the maximum amounts
that are not considered taxable income to the employee. Israeli employers and employees
are required to pay predetermined sums to the National Insurance Institute, which is
similar to the United States Social Security Administration. The payments to the National
Insurance Institute are determined progressively in accordance with wages.

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

# Beneficial Ownership of
Executive Officers and Directors

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

As
of December 31, 2008, our executive officers and directors as a group held options to
purchase an aggregate of 522,600 of our ordinary shares. The weighted average exercise
price of these options is $13.9 and their expiration dates range from 2012 to 2015. For
information regarding ownership of our ordinary shares by our directors and executive
officers as a group, see Item 7.A. Major Shareholders and Related Party
Transactions  Major Shareholders.

# Equity Incentive Plans

EZchip Semiconductor
Equity Incentive Plans

2003
Amended and Restated Equity Incentive Plan. On October 2003, EZchip Semiconductor
adopted the 2003 Israeli Share Option Plan. The plan was amended in December 2006 and
further amended in December 2007. The plan was renamed the 2003 Amended and Restated
Equity Incentive Plan, or the 2003 Israel Plan. Up to 933,760 ordinary shares may
currently be granted under the 2003 Israel Plan, which amount is reduced by three shares
for each restricted share unit that we grant under the plan and by one share for each
option that we grant under the plan. The 2003 Israel Plan is administered by the Board of
Directors, or a committee of the Board that is delegated authority to act as the
administrator. The administrator has broad discretion, subject to certain limitations, to
determine the persons entitled to receive awards, the terms and conditions on which awards
are granted and the number of shares subject to each award granted. Under the 2003 Israel
Plan, we may grant restricted share units, or RSUs, and options to purchase our ordinary
shares to Israeli employees, directors, consultants, advisers and service providers of our
company and its subsidiaries. In accordance with the terms and conditions imposed by
Section 102 of the Israel Income Tax Ordinance, grantees who receive awards under the 2003
Israel Plan are afforded certain tax benefits (excluding our controlling shareholders or
those who are not our employees or directors). We have elected the benefits available
under the capital gains alternative. There are various conditions that must be
met in order to qualify for these benefits, including registration of the awards in the
name of a trustee for each of the employees who is granted awards. Each award, and any
ordinary shares acquired upon the exercise of the award, must be held by the trustee for a
period of 24 months. The 2003 Israel Plan provides for the awards granted to have a
maximum exercise period of ten years from the date of grant. Awards granted under the 2003
Israel Plan are generally exercisable over four years. Awards that are not exercised will
become available for further grant by the Board under the 2003 Israel Plan. In addition,
pursuant to amendment to the 2003 Israel Plan approved by our shareholders in December
2007, on January 1st of each year, commencing January 1, 2009, to the extent the number of
ordinary shares reserved, authorized and available for issuance under the 2003 Israel Plan
on such date is less than 4% of the number of ordinary shares issued and outstanding on
such date, the number of ordinary shares reserved, authorized and available for issuance
under the 2003 Israel Plan will automatically increase on such date to equal 4% of the
number of ordinary shares issued and outstanding on such date.

47

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As
of December 31, 2008, options to purchase an aggregate of 1,550,250 ordinary shares were
outstanding under the 2003 Israel Plan, with a weighted average exercise price of $13.8
per share. In addition, as of December 31, 2008, 15,750 RSUs were outstanding under the
2003 Israel Plan.

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

As
of December 31, 2008, options to purchase an aggregate of 166,000 ordinary shares were
outstanding under the 2007 U.S. Plan, with a weighted average exercise price of $13.9 per
share.

EZchip Technologies
Option Plans

Since
2000, EZchip Technologies has granted options to purchase its ordinary shares to key
employees, shareholders and directors pursuant to the Israeli and the U.S. stock option
plans (the 2000 Section 102 Share Option Plan, the 2003 Section 102 Share Option Plan and
the 2001 U.S. Stock Option Plan), as an incentive to attract and retain qualified
personnel. Under these plans a total of 16,500,000 ordinary shares of EZchip Technologies
were reserved and authorized for issuance. Under the terms of these grants, options
generally become exercisable over a four-year period, commencing with the date of grant.
The options generally expire seven to ten years from the date of the grant, and are
non-transferable, except under the laws of succession.

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

As
of December 31, 2008, there were outstanding options to purchase ordinary shares of EZchip
Technologies representing approximately 9.4% of the share capital of EZchip Technologies
on an as converted and fully diluted basis. Approximately 31% of these options were held
by directors and officers of our company.

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

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

The
following table sets forth certain information as of March 30, 2009 (unless otherwise
indicated below) for (i) each shareholder known to us to beneficially own more than
5% of our outstanding ordinary shares, (ii) each of our executive officers and directors
that beneficially owns more than 1% of our outstanding ordinary shares, and (iii) our
executive officers and directors as a group. The information in the table below is based
on 23,344,254ordinary shares outstanding as of March 30, 2009. Each of our
outstanding ordinary shares has identical rights in all respects.

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

| | 
| | 

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

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

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

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

| | (5) | As
of March 30, 2009 all directors and executive officers as a group (eight
          persons) held options to purchase an aggregate of 120,000 ordinary shares
          exercisable within 60 days of the date of the table with a weighted average
          exercise price of $12.61. The options expire between 2012 and 2015.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Significant Changes in the Ownership
of Major Shareholders

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

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

Major Shareholders Voting Rights

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

# Record Holders

Based
on a review of the information provided to us by our transfer agent, as of March 25, 2009,
there were 38 holders of record of our ordinary shares, including 31 holders of record
residing in the United States holding 22,929,140 ordinary shares, or 98.22% of the
aggregate 23,344,254 ordinary shares outstanding as of such date. These numbers are not
representative of the number of beneficial holders of our shares nor is it representative
of where such beneficial holders reside since many of these ordinary shares were held of
record by brokers or other nominees (including one U.S. nominee company, CEDE & Co.,
which held approximately 76.69% of our outstanding ordinary shares as of such date).

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

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

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

50

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

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

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

Not
applicable.

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

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

Consolidated Financial Statements

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

# Export Sales

See
Note 18bto the consolidated financial statements.

# Legal Proceedings

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

# Dividend Policy

We
anticipate that we will retain any future earnings to support operations and to finance
the growth and development of our business. In addition, tax-exempt income attributable to
our status as an approved enterprise under Israeli tax law cannot be distributed to
shareholders without subjecting us to taxes except upon the complete liquidation of our
company. Tax will be levied if we decide to distribute such income in the future.
Currently, we intend to reinvest the amount of our tax-exempt income. Any future dividend
policy will be determined by our Board of Directors and will be based upon conditions then
existing, including our results of operations, financial condition, current and
anticipated cash needs, contractual restrictions and other conditions. In addition, our
articles of association provide that the declaration of a dividend requires approval by an
ordinary resolution of our shareholders, which may decrease but not increase the amount
proposed by the Board of Directors.

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

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

Except
as otherwise disclosed in this Annual Report, there has been no material change in our
financial position since December 31, 2008.

51

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

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

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

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

# Annual Share Price
Information

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

|     | NASDAQ | Tel Aviv Stock Exchange
|---- | ------ | -----------------------
|
|
|
|
|2004 |        |                        
|2005 |        |                        
|2006 |        |                        
|2007 |        |                        
|2008 |        |                        

# Quarterly Share Price
Information

The
following table sets forth, for each of the full financial quarters in the years
indicated, the range of high ask and low bid prices of our ordinary shares on the NASDAQ
Global Market (for periods from January 4, 2008) and the NASDAQ Capital Market (for
periods prior to January 4, 2008) and the Tel Aviv Stock Exchange:

|               | NASDAQ | Tel Aviv Stock Exchange
|-------------- | ------ | -----------------------
|
|
|
|
|2007           |        |                        
|First quarter  |        |                        
|Second quarter |        |                        
|Third quarter  |        |                        
|Fourth quarter |        |                        
|               |        |                        
|2008           |        |                        
|First quarter  |        |                        
|Second quarter |        |                        
|Third quarter  |        |                        
|Fourth quarter |        |                        

52

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# Monthly Share Price
Information

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

|                                    | NASDAQ | Tel Aviv Stock Exchange
|----------------------------------- | ------ | -----------------------
|
|
|
|
|October 2008                        |        |                        
|November 2008                       |        |                        
|December 2008                       |        |                        
|January 2009                        |        |                        
|February 2009                       |        |                        
|March 2009 (through March 30, 2009) |        |                        

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

Not
applicable

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

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

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

Not
applicable.

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

Not
applicable.

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

Not
applicable.

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

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

Not
applicable.

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

# Purposes and Objects of
the Company

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

# Powers of the Directors

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

53

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# Rights Attached to
Ordinary Shares

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

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

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

Under
our articles of association, most decisions may be approved by a simple majority, although
certain resolutions, referred to as special resolutions (for example, changes to the
articles of association), require approval of at least 75% of the shares present and
voting on the matter.

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

# Changing Rights Attached
to Shares

According
to our articles of association, the rights of our ordinary shares may be cancelled, added
to, restricted, amended or otherwise altered with a vote of the holders of at least 75% of
the outstanding ordinary shares voting at a duly convened shareholders meeting.

# Annual and Extraordinary
General Meetings

We
must hold our annual general meeting of shareholders each year no later than 15 months
from the last annual meeting, at a time and place determined by the board of directors.
Depending on the matter to be voted upon, notice of at least 21 days or 35 days prior to
the date of the meeting is required. A special meeting may be convened by request of two
directors, one quarter of the directors in office, or by written request of one or more
shareholders holding at least 5% of our issued share capital and 1% of the voting rights
or one or more shareholders holding at least 5% of the voting rights. Shareholders
requesting a special meeting must submit their proposed resolution with their request.

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

54

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# Limitations on The
Rights to Own Securities

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

# Anti-Takeover Provisions
Under Israeli Law

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

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

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

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

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

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

On
April 29, 2004, EZchip Technologies and eSilicon Corporation, or eSilicon, entered into a
Master ASIC Services Agreement. Under the agreement, eSilicon agreed to perform, or cause
to be performed on its behalf by an agreed upon party, at the request of EZchip
Technologies, various ASIC services and manufacture certain ASIC products for EZchip
Technologies. eSilicon agreed to use commercially reasonable efforts to furnish the
services and develop and deliver the deliverables specified in any order issued by EZchip
Technologies under a project proposal determined by the parties under the agreement.
Currently, eSilicon manufactures our NP-2 network processor. The agreement is for an
initial term of three years, unless terminated earlier in accordance with its terms, and
will automatically renew for an additional one-year term following the initial term and
each renewal term thereafter, unless terminated by either party upon 90 days notice prior
to the date of the automatic renewal. This summary is qualified in its entirety by the
text of the agreement, which is an exhibit to this Annual Report.

55

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On
January 1, 2007, EZchip Technologies and Juniper Networks entered into an Agreement for
Purchase and Sale of Goods. Under the agreement, we agreed to supply to Juniper Networks
our network processors for incorporation in Juniper Networks network equipment
products and components upon orders issued by Juniper Networks or its affiliates.
Currently, we supply Juniper Networks with our NP-2 network processor. The agreement is
for an initial term of three years, unless terminated earlier in accordance with its
terms, and will automatically be extended for successive two-year terms, unless terminated
by either party upon prior notice in accordance with its terms. The agreement does not
provide for any minimum purchase orders by Juniper Networks. For the years ended December
31, 2006, 2007 and 2008, Juniper Networks paid us under the agreement $1.6 million, $8.1
million and $18.4 million, respectively. This summary is qualified in its entirety by the
text of the agreement, which is an exhibit to this Annual Report.

|D. | EXCHANGE
CONTROLS
|-- | -----------------

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

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

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

# ISRAELI TAX
CONSIDERATIONS, FOREIGN EXCHANGE REGULATIONS AND INVESTMENT PROGRAMS

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

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

# General corporate tax
structure in Israel

Israeli
companies were generally subject to corporate tax at the rate of 27% of their taxable
income in 2008. The corporate tax rate was reduced to 26% in 2009 and will be further
reduced to 25% in 2010 and thereafter. Israeli companies are generally subject to capital
gains tax at a rate of 25% for capital gains after January 1, 2003.

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

56

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# Law for the
Encouragement of Capital Investments, 1959

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

Under
the Approved Enterprise program, a company is eligible for governmental grants. The tax
benefits under such program are generally limited to 12 years from commencement of
operation or 14 years from the date of the approval, whichever is earlier. A company may
elect to receive an alternative package comprised of tax benefits, referred to as the
Alternative Track, rather than grants. Under the Alternative Track, a companys
undistributed income derived from an Approved Enterprise is exempt from corporate tax for
an initial period (two to ten years, depending on the geographic location of the Approved
Enterprise within Israel). The exemption begins in the first year that the company
realizes taxable income from the Approved Enterprise. There is no year limitation to the
Alternative Track. As of December 31, 2008, we had not generated any income under the
provisions of the Investment Law.

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

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

57

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

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

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

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

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

Currently
we have two approved programs under the Investments Law, which entitle us to tax benefits.
The first program pursuant to the Investment Law, as in effect prior to the amendment
(Approved Enterprise) and the second program pursuant to the Investment Law, as in effect
after the amendment (Privileged Enterprise). Both approved programs are subject to the
alternative track provisions pursuant to which undistributed income derived from the
programs is exempt from tax for a ten year period. The exemption period for our approved
programs start in the first year in which we generate taxable income from the approved
enterprise, subject to certain conditions.As mentioned above, the years
limitation does not apply to the exemption period for the approved enterprise.

We
and EZchip Technologies intend to continue to elect our investments in productive assets
as Privileged Enterprise programs, but we cannot assure you that we will do so or that we
will be successful. We intend to reinvest the entire amount of our tax-exempt income and
not to distribute this income as a dividend.

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

As
a result of the amendment to the Investment Law in April 2005, tax-exempt income generated
under the provisions of the amended law will subject us to taxes upon distribution or
liquidation and we may be required to record deferred tax liability with respect to such
tax-exempt income. As of December 31, 2008, we had not generated any income under the
provisions of the new law.

58

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

Since
April 2006, our research and development efforts have been financed, in part, through
grants from the Office of the Chief Scientist, or the OCS, under our approved plans in
accordance with the Israeli Law for Encouragement of Research and Development in the
Industry, 1984, or the R&D Law. Through December 31, 2008, we had applied and received
approval for grants totaling $6.6 million from the OCS. Under Israeli law and the
approved plans, royalties on the revenues derived from sales of any of our products
incorporating OCS funded know-how (including ancillary services) are payable to the
Israeli government, generally at the rate of 4.0% during the first three years and 4.5%
beginning with the fourth year, up to the amount of the received grants as adjusted for
fluctuation in the U.S. dollar/NIS exchange rate. Royalties are paid on our
consolidated revenues. With respect to royalties for revenues derived from the partnership
with Marvell, royalties to the OCS will be calculated based on Marvells sale price
to the customer. The grants also bear interest equal to the 12-month London Interbank
Offered Rate applicable to dollar deposits that is published on the first business day of
each calendar year.

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

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

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

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

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

As
of December 31, 2008, we had an outstanding contingent obligation to pay royalties in the
amount of approximately $6.4 million.

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

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

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

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

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

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

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

59

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

# Taxation of Shareholders
on Receipt of Dividends

Taxation of Non-Israeli
Shareholders

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

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

Taxation of Israeli
Shareholders

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

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

Capital Gains Taxes
Applicable to Non-Israeli Shareholders

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

Foreign Exchange
Regulations

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

60

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# U.S. FEDERAL INCOME TAX
CONSIDERATIONS

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

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

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

# Distributions Paid on
the Ordinary Shares

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

61

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

Subject
to certain limitations, qualified dividend income received by a noncorporate
U.S. Holder in tax years beginning on or before December 31, 2010 will be subject to tax
at a reduced maximum tax rate of 15 percent. Distributions taxable as dividends paid on
the ordinary shares should qualify for the 15 percent rate provided that either: (i)
EZchip Semiconductor is entitled to benefits under the income tax treaty between the
United States and Israel (the Treaty) or (ii) the ordinary shares are readily
tradable on an established securities market in the United States and certain other
requirements are met.  We believe that EZchip Semiconductor is entitled to benefits
under the Treaty and that the ordinary shares currently are readily tradable on an
established securities market in the United States.  However, no assurance can be
given that the ordinary shares will remain readily tradable.  The rate reduction does
not apply unless certain holding period requirements are satisfied.  With respect to
the ordinary shares, the U.S. Holder must have held such shares for at least 61 days
during the 121-day period beginning 60 days before the ex-dividend date.  The rate
reduction also does not apply to dividends received from passive foreign investment
companies, see discussion below, or in respect of certain hedged positions or in certain
other situations.  The legislation enacting the reduced tax rate contains special
rules for computing the foreign tax credit limitation of a taxpayer who receives dividends
subject to the reduced tax rate.  U.S. Holders of ordinary shares should consult
their own tax advisors regarding the effect of these rules in their particular
circumstances.

# Sale, Exchange or Other
Disposition of the Ordinary Shares

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

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

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

62

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# Passive Foreign
Investment Company Status

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

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

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

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

U.S.
          Shareholders holding marketable stock (which we consider our
          ordinary shares to be) in a PFIC may make an election to           mark-to-market the
ordinary shares annually, rather than be subject           to the above-described rules.
Under such election, the U.S. Shareholder will           include in income each year any
excess of the fair market value of the PFIC           stock at the close of each taxable
year over the U.S. Shareholders           adjusted basis in such stock. The U.S.
Shareholder will generally be allowed an           ordinary deduction for the excess, if
any, of the adjusted basis of the PFIC           stock over its fair market value as of
the close of the taxable year, or the           amount of any net mark-to-market gains
recognized for prior taxable years,           whichever is less. A U.S. Shareholders
adjusted tax basis in the ordinary           shares will generally be adjusted to reflect
the amounts included or deducted           under the mark-to-market election.
Additionally, any amounts included in income           pursuant to a mark-to-market
election, as well as gain on the actual sale or           other disposition of the PFIC
stock, are treated as ordinary income. Ordinary           loss treatment also applies to
any loss recognized on the actual sale or           disposition of PFIC stock to the
extent that the amount of such loss does not           exceed the net mark-to-market
gains previously included with respect to such           stock. Gain or loss from the
disposition of ordinary shares (as to which a           mark-to-market election
was made) in a year in which we are no           longer a PFIC will be capital gain or
loss. An election to mark-to-market           generally will apply to the taxable year in
which the election is made and all           subsequent taxable years.

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

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

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

# Backup Withholding and
Information Reporting

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

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

Not
applicable.

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

Not
applicable.

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

We
are subject to certain of the information reporting requirements of the Exchange Act . As
a foreign private issuer, we are exempt from the rules and regulations under
the Securities Exchange Act prescribing the furnishing and content of proxy statements,
and our officers, directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the 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 Exchange Act. However, we file with the Securities and Exchange Commission an
annual report on Form 20-F containing financial statements audited by an independent
accounting firm. We also furnish reports on Form 6-K containing unaudited financial
information after the end of each of the first three quarters. We post our Annual Report
on Form 20-F on our Website (www.ezchip.com) promptly following the filing of our
Annual Report with the Securities and Exchange Commission. The information on our website
is not incorporated by reference into this annual report.

This
report and other information filed or to be filed by us can be inspected without charge
and copied at prescribed rates at the public reference facilities maintained by the
Securities and Exchange Commission at:

| | 100
F Street, NE  Public
Reference Room Washington,
D.C. 20549
| | --------------------------------------------------------------

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

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The
documents concerning our company referred to in this annual report may also be inspected
at our offices located at 1 Hatamar Street, PO Box 527, Yokneam 20692, Israel.

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

Not
applicable.

|ITEM 11. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------

# General

Market
risks relating to our operations result primarily from currency fluctuations, changes in
the market value of our investments and changes in interest rates.

# Currency Exchange Rate
Risk Management

Our
functional currency is the U.S. dollar, and most of our revenue is denominated in U.S.
dollars. However, a significant portion of the cost of our operations, mainly personnel
costs of our operations in Israel, is incurred in NIS. Therefore, our NIS-related costs,
as expressed in U.S. dollars, are influenced by the exchange rate between the U.S. dollar
and the NIS. In addition, NIS-linked balance sheet items, mainly employment related, may
create foreign exchange gains or losses, based on changes in the exchange rate between the
U.S. dollar and the NIS at the beginning and end of the reporting period, consequently
affecting our net income and earnings per share.

We
attempt to limit our exposure to currency exchange rate risk by using various hedging
techniques, including forward and option contracts and through natural
hedging, i.e., attempting to maintain similar levels of assets and liabilities in NIS,
U.S. dollars and other currencies, to the extent commercially feasible. However, we cannot
eliminate the effects of currency fluctuations altogether. Exchange rate fluctuations
resulting in a devaluation of the U.S. dollar compared to the NIS could have a material
adverse impact on our operating results and share price.

We
account for derivatives and hedging based on SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, or SFAS No. 133. SFAS No. 133
requires us to recognize all derivatives on the balance sheet at fair value. If the
derivative meets the definition of a cash flow hedge and is so designated, changes in the
fair value of derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The ineffective
portion of a derivatives change in fair value is recognized in earnings depending on
the exposure being hedged.

As
of December 31, 2008, we had outstanding forward contracts in the amount of $4.7 million
and outstanding option contracts in the amount of $3.6 million. These contracts are for a
period of up to 12 months.

# Cash Investments,
Marketable Securities and Interest Rate Risk Management

Our
cash investment policy seeks to preserve principal and maintain adequate liquidity while
maximizing the income we receive from our investments without significantly increasing the
risk of loss. To minimize investment risk, we maintain a diversified portfolio across
various maturities, types of investments and issuers, which may include, from time to
time, money market funds, U.S. government bonds, state debt, bank deposits and
certificates of deposit, and investment grade corporate debt. Our cash management policy
does not allow us to purchase or hold derivative or commodity instruments, structures or
sub-prime related holdings (such as auction rate securities and collateralized
debt obligation) or other financial instruments for trading purposes.

As
of December 31, 2008, we had $20.9 million in cash and cash equivalents and $27.2 million
in marketable securities. As of such date our marketable securities portfolio was composed
of investment grade corporate bonds bearing average annual interest rates of approximately
3.9%, with average maturities of 18 months (maximum maturities of 2.5 years).

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The
performance of the capital markets affects the values of the funds we hold in marketable
securities. These assets are subject to market fluctuations. Due to recent market
developments, including a series of rating agency downgrades, the fair value of these
investments has declined and may decline in the future. As of December 31, 2008, net
unrealized losses in our marketable securities portfolio totaled $0.7 million. We
periodically monitor our investments for adverse material holdings related to the
underlying financial solvency of the issuers of the marketable securities in our
portfolio.

Our
exposure to market risk for changes in interest rates relates primarily to our investment
in marketable securities. Investments in both fixed rate and floating rate interest
bearing securities carry a degree of interest rate risk. The fair market value of fixed
rate securities may be adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than predicted if interest rates fall. Due in part
to these factors, our future financial results may be negatively affected in the event
that interest rates fluctuate.

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

Not
applicable.

# PART II

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

None

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

Not
applicable.

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

# Disclosure Controls and
Procedures

Our
principal executive officer and chief financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)
of the Exchange Act) as of December 31, 2008, have concluded that, as of such date,
our disclosure controls and procedures were effective and ensured that information
required to be disclosed by us in reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal executive officer
and chief financial officer, to allow timely decisions regarding required disclosure and
is recorded, processed, summarized and reported within the time periods specified by the
rules of the Securities and Exchange Commission.

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

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

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

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

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

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.

Our
management assessed the effectiveness of our internal control over financial reporting, as
of December 31, 2008. In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on that assessment, our management concluded
that as of December 31, 2008, our internal control over financial reporting is
effective.

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

# Changes in Internal
Control over Financial Reporting

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

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

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

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

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

We
have adopted a code of ethics that applies to our principal executive officer and all
senior financial officers of our company, including the chief financial officer, chief
accounting officer or controller, or persons performing similar functions. We undertake to
provide without charge, upon request, written copies of the code of ethics. Requests
should be addressed to EZchip Semiconductor Ltd., 1 Hatamar Street, P.O. Box 527, Yokneam
20692, Israel, Attention: Investor Relations. If we make any substantive amendment to the
code of ethics or grant any waivers, including any implicit waiver, from a provision of
the codes of ethics, we will disclose the nature of such amendment or waiver on our
website. The code of ethics has been posted on our website at.
http://www.ezchip.com/Images/pdf/EZchip_Code_of_Business_Conduct_and_Ethics.pdf.

67

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

# Fees Paid To Independent
Public Accountants

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

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

| | 
| | 

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

| | (2) | Audit-related
fees in 2007 relate to a comfort letter provided to investors,           review of
registration statements filed with the Securities and Exchange           Commission,
accounting consultation and audits in connection with our           applications to the
Office of the Chief Scientist. Audit-related fees in 2008           relate to services
provided in connection with the Securities and Exchange           Commission review of
our annual report on Form 20-F for the fiscal year ended           December 31, 2007.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Tax
fees in 2007 relate to tax consulting associated with tax compliance,
          international taxation, tax planning and tax advice for actual or contemplated
          transactions and employee benefits. Tax fees in 2008 relate to tax consulting
          with respect to our privileged enterprise, tax compliance, tax planning and tax
          advice for actual transactions.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Pre-Approval Policies
and Procedures

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

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

Not
applicable.

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

There
were no ordinary shares of EZchip Semiconductor purchased by us or on our behalf or by any
affiliated purchaser during 2008.

|ITEM 16F. |  | CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
|--------- |  | --------------------------------------------

Not
applicable.

68

---

---

|ITEM 16G. |  | CORPORATE GOVERNANCE
|--------- |  | --------------------

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

On
July 27, 2005, we provided NASDAQ with a notice of non-compliance with Rule 4350. In
practice, we do not comply with the following requirements of Rule 4350, and instead
follow Israeli law and practice with respect to such corporate governance practices:

| |  | NASDAQ
rules regarding the directors nominations process, which require that director nominees
be selected, or recommended for the board of directors, either by (a) a majority of
independent directors or (b) a nominations committee comprised solely of independent
directors. Under Israeli law and practice our directors are recommended by our board of
directors for election by our shareholders.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | NASDAQ
rules regarding compensation of executive officers, which require that the compensation
of the chief executive officer and all other executive officers be determined, or
recommended to the board of directors for determination, either by (i) a majority of the
independent directors or (ii) a compensation committee comprised solely of independent
directors. Under the Israeli Companies Law, arrangements as to compensation of office
holders who are not directors require approval by the board of directors, provided that
they are not deemed extraordinary transactions, unless otherwise provided in the articles
of association. Our articles of association do not provide otherwise. Any compensation
arrangement with an office holder who is not a director that is deemed an extraordinary
transaction, the exemption of such office holder from liability, the insurance of such
office holder and the indemnification of such office holder, or an undertaking to
indemnify such office holder, require both audit committee and board of directors
approval. The compensation, exemption, indemnification and insurance of office holders
who are directors must be approved by our audit committee, board of directors and
shareholders. If the office holder is a controlling shareholder or a relative of a
controlling shareholder, any extraordinary transaction, compensation, exemption,
indemnification and insurance of the office holder must be approved by our audit
committee, board of directors and shareholders, supported by the vote of at least
one-third of the shares of the shareholders that have no personal interest in the
transaction voting on the matter, or provided that the total number of shares held by
shareholders that have no personal interest in the transaction that voted against the
proposal did not exceed one percent of all of the voting rights in the company.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

69

---

---

# PART III

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

Not
applicable.

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

See
pages F-1 to F-45 of this annual report.

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

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

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

|1.2 |  | Amended
and Restated Articles of Association of the Registrant (2)
|--- |  | ------------------------------------------------------------------

|1.3 |  | Certificate
of Name Change of the Registrant (translated from Hebrew)
|--- |  | ---------------------------------------------------------------------

|4.1 |  | EZchip
Semiconductor Ltd. 2003 Amended and Restated Equity Incentive Plan (3)
|--- |  | -----------------------------------------------------------------------------

|4.2 |  | EZchip
Semiconductor Ltd. 2007 U.S. Equity Incentive Plan (4)
|--- |  | -------------------------------------------------------------

|4.3 |  | Ordinary
Share Purchase Agreement dated August 20, 2007, by and between the
                             Registrant and Mr. J. Cheney (5)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | Ordinary
Share Purchase Agreement dated September 3, 2007, by and between the
                             Registrant and Mr. J. Cheney (6)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | Ordinary
Share Purchase Agreement dated September 9, 2007, by and between the
                             Registrant and Mr. J. Cheney (7)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | Agreement
for Purchase and Sale of Goods dated January 1, 2007, by and between
                             Juniper Networks, Inc. and EZchip Technologies Ltd.(8)*
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | Master
ASIC Services Agreement dated April 29, 2004, by and between eSilicon
                             Corporation and EZchip Technologies Ltd.(9)*
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

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

|12.1 |  | Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) under the
                             Securities Exchange Act, as amended
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) under the
                             Securities Exchange Act, as amended
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|13.1 |  | Certification
of Principal Executive Officer pursuant to18 U.S.C. 1350, as adopted
                             pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13.2 |  | Certification
of Chief Financial Officer pursuant to18 U.S.C. 1350, as adopted
                             pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

---

| | * | Confidential
treatment has been requested for certain deleted portions.
| | - | -----------------------------------------------------------------------

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

| | (2) | Filed
as Exhibit 1.2 to the Registrants Annual Report on Form 20-F for the
               year ended December 31, 2007, and incorporated herein by reference.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

70

---

---

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

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

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

| | (8) | Filed
as Exhibit 4.7 to the Registrants Annual Report on Form 20-F/A for
               the year ended December 31, 2007 and incorporated herein by reference.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (9) | Filed
as Exhibit 4.8 to the Registrants Annual Report on Form 20-F/A for
               the year ended December 31, 2007 and incorporated herein by reference.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

71

---

---

# EZCHIP SEMICONDUCTOR
LTD. (FORMERLY LANOPTICS LTD)
AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2008

# IN U.S. DOLLARS

# INDEX

|                                                           | Page       
|---------------------------------------------------------- | -----------
|
|
|
|
|Reports of Independent Registered Public Accounting Firm   | F-2 - F-3  
|                                                          
|Consolidated Balance Sheets                                | F-4 - F-5  
|                                                          
|Consolidated Statements of Operations                      | F-6        
|                                                          
|Statements of Changes in Shareholders' Equity (Deficiency) | F-7 - F-8  
|                                                          
|Consolidated Statements of Cash Flows                      | F-9 - F-10 
|                                                          
|Notes to Consolidated Financial Statements                 | F-11 - F-45

F - 1

---

---

| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
|
|
|
|
| | Kost Forer Gabbay & Kasierer 2 Pal-Yam Ave.Haifa 33095, IsraelTel: 972 (4) 8654000Fax: 972 (3) 5633443www.ey.com.il

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders and
Board of Directors of

# EZCHIP SEMICONDUCTOR
LTD. (FORMERLY LANOPTICS LTD.)

We
have audited the accompanying consolidated balance sheets of EZchip Semiconductor Ltd. (the
Company) and its subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of operations, changes in shareholders equity (deficiency)
and cash flows for each of the three years in the period ended December 31, 2008. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our
audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion the 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, 2008 and 2007, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31 2008, in
conformity with U.S. generally accepted accounting principles.

As
discussed in Note 2m to the consolidated financial statements effective January 1, 2007,
the Company adopted the provisions of Statement of Financial Accounting Standard
Interpretation No. 48 Accounting for Uncertainty In Income Taxes, an
interpretation of FASB Statement no. 109.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 30, 2009 expressed an unqualified
opinion thereon.

|               |                                 
|-------------- | --------------------------------
|
|
|
|               | /s/ Kost Forer Gabbay & Kasierer
|Haifa, Israel  | KOST FORER GABBAY & KASIERER    
|March 30, 2009 | A Member of Ernst & Young Global

F - 2

---

---

| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
|
|
|
|
| | Kost Forer Gabbay & Kasierer 2 Pal-Yam Ave.Haifa 33095, IsraelTel: 972 (4) 8654000Fax: 972 (3) 5633443www.ey.com.il

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders and
Board of Directors of

# EZCHIP SEMICONDUCTOR
LTD. (FORMERLY LANOPTICS LTD.)

We
have audited EZchip Semiconductor Ltd (the Company) and its subsidiaries
internal control over financial reporting as of December 31, 2008, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Companys
management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Form-20F. Our responsibility is to express an
opinion on the Companys internal control over financial reporting based on our
audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other procedures as
we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

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

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In
our opinion, the Company and its subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008, based on the
COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company and its
subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of
operations, changes in shareholders equity (deficiency) and cash flows for each of
the three years in the period ended December 31, 2008 and our report dated March 30,
2009 expressed an unqualified opinion thereon.

|               |                                 
|-------------- | --------------------------------
|
|
|
|
|               | /s/ Kost Forer Gabbay & Kasierer
|Haifa, Israel  | KOST FORER GABBAY & KASIERER    
|March 30, 2009 | A Member of Ernst & Young Global

F - 3

---

---

|                                                                        
|------------------------------------------------------------------------
|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|                                                                        
|CONSOLIDATED BALANCE SHEETS                                             
|                                                                        
|U.S. dollars in thousands                                               

|                                                                 |  | December 31,
|---------------------------------------------------------------- |  | ------------
|
|
|
|
|ASSETS                                                           |  |             
|                                                                 |  |             
|CURRENT ASSETS:                                                  |  |             
|Cash and cash equivalents                                        |  |             
|Available-for-sale marketable securities                         |  |             
|Trade receivables (net of allowance for doubtful accounts of $40 |  |             
|as of December 31, 2008 and 2007).                               |  |             
|Other accounts receivable and prepaid expenses                   |  |             
|Inventories                                                      |  |             
|                                                                 |  |             
|                                                                 |  |             
|Total current assets                                             |  |             
|                                                                 |  |             
|                                                                 |  |             
|LONG-TERM INVESTMENTS:                                           |  |             
|Prepaid development and production costs, net                    |  |             
|Severance pay fund                                               |  |             
|                                                                 |  |             
|                                                                 |  |             
|Total long-term investments                                      |  |             
|                                                                 |  |             
|                                                                 |  |             
|PROPERTY AND EQUIPMENT, NET                                      |  |             
|                                                                 |  |             
|                                                                 |  |             
|INTANGIBLE ASSETS, NET                                           |  |             
|                                                                 |  |             
|                                                                 |  |             
|GOODWILL                                                         |  |             
|                                                                 |  |             
|                                                                 |  |             
|Total assets                                                     |  |             
|                                                                 |  |             

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

F - 4

---

---

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

|                                                                |  | December 31,
|--------------------------------------------------------------- |  | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                            |  |             
|                                                                |  |             
|CURRENT LIABILITIES:                                            |  |             
|Trade payables                                                  |  |             
|Other accounts payable and accrued expenses                     |  |             
|                                                                |  |             
|                                                                |  |             
|Total current liabilities                                       |  |             
|                                                                |  |             
|                                                                |  |             
|LONG-TERM LIABILITIES:                                          |  |             
|Accrued severance pay                                           |  |             
|                                                                |  |             
|                                                                |  |             
|Total long-term liabilities                                     |  |             
|                                                                |  |             
|                                                                |  |             
|EMPLOYEE STOCK OPTIONS IN EZCHIP TECHNOLOGIES                   |  |             
|                                                                |  |             
|                                                                |  |             
|PREFERRED SHARES IN EZCHIP TECHNOLOGIES                         |  |             
|                                                                |  |             
|                                                                |  |             
|COMMITMENTS AND CONTINGENT LIABILITIES                          |  |             
|                                                                |  |             
|SHAREHOLDERS' EQUITY:                                           |  |             
|Share capital                                                   |  |             
|Ordinary Shares of NIS 0.02 par value -                         |  |             
|Authorized: 50,000,000 shares at December 31, 2008 and 2007,    |  |             
|respectively; Issued and outstanding: 23,344,004 and 18,312,245 |  |             
|shares at December 31, 2008 and 2007, respectively              |  |             
|Additional paid-in capital                                      |  |             
|Accumulated other comprehensive loss                            |  |             
|Accumulated deficit                                             |  |             
|                                                                |  |             
|                                                                |  |             
|Total shareholders' equity                                      |  |             
|                                                                |  |             
|                                                                |  |             
|Total liabilities and shareholders' equity                      |  |             
|                                                                |  |             

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

F - 5

---

---

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

|                                                   |  | Year ended December 31,
|-------------------------------------------------- |  | -----------------------
|
|
|
|
|Revenues                                           |  |                        
|Costs of revenues (*)                              |  |                        
|Amortization of existing technology                |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Gross profit                                       |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Operating expenses:                                |  |                        
|Research and development (net of grants and        |  |                        
|participations in the amount of $3,011, $2,122 and |  |                        
|$1,003 for the years ended December 31, 2008, 2007 |  |                        
|and 2006, respectively) (*)                        |  |                        
|In-process research and development charge         |  |                        
|Selling and marketing (*)                          |  |                        
|General and administrative (*)                     |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Total operating expenses                           |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Operating loss                                     |  |                        
|Financial income (expenses), net                   |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Loss before minority interest                      |  |                        
|                                                   |  |                        
|Minority interest in loss of EZchip Technologies   |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Net loss                                           |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Net loss per share (basic and diluted)             |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Weighted average number of Ordinary Shares used in |  |                        
|computing net loss per share                       |  |                        
|                                                   |  |                        

(*) Includes
stock-based compensation expenses. (see also Note 15c).

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

F - 6

---

---

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

|                                                            | Number of
ordinary
shares | Share
capital | Additional
paid-in
capital | Accumulated
other
comprehensive
income (loss) | Accumulated
deficit | Total
comprehensive
loss | Total
shareholders'
equity
(deficiency)
|----------------------------------------------------------- | ------------------------- | ------------- | -------------------------- | --------------------------------------------- | ------------------- | ------------------------ | ---------------------------------------
|
|
|
|
|Balance as of January 1, 2006                               |                           |               |                            | 11,633,771                                    |                     | $                        | 75                                     
|                                                            |                           |              
|Issuance of shares, net of issuance cost of $43             |                           |               |                            | 3,878,235                                     |                     |                          | 18                                     
|Exercise of stock options                                   |                           |               |                            | 157,587                                       |                     |                          | *)  -                                  
|Stock-based compensation                                    |                           |               |                            | -                                             |                     |                          | -                                      
|Comprehensive loss:                                         |                           |              
|Unrealized gain on available-for-sale marketable securities |                           |               |                            | -                                             |                     |                          | -                                      
|Net loss                                                    |                           |               |                            | -                                             |                     |                          | -                                      
|                                                            |                           |               |                            |                                               |                     |                          |                                        
|                                                            |                           |              
|Total comprehensive loss                                    |                           |               |                            |                                               |                     |                          |                                        
|                                                            |                           |               |                            |                                               |                     |                          |                                        
|                                                            |                           |              
|Balance as of December 31, 2006                             |                           |               |                            | 15,669,593                                    |                     |                          | 93                                     
|Issuance of shares, net of issuance cost of $150            |                           |               |                            | 2,500,000                                     |                     |                          | 12                                     
|Exercise of stock options                                   |                           |               |                            | 142,652                                       |                     |                          | 1                                      
|Stock-based compensation                                    |                           |               |                            | -                                             |                     |                          | -                                      
|Comprehensive loss:                                         |                           |              
|Unrealized gain on available-for-sale marketable securities |                           |               |                            | -                                             |                     |                          | -                                      
|Cumulative effect of change in accounting for               |                           |              
|uncertainties in income taxes (FIN 48 - see Note 17a)       |                           |               |                            | -                                             |                     |                          | -                                      
|Net loss                                                    |                           |               |                            | -                                             |                     |                          | -                                      
|                                                            |                           |               |                            |                                               |                     |                          |                                        
|                                                            |                           |              
|Total comprehensive loss                                    |                           |               |                            |                                               |                     |                          |                                        
|                                                            |                           |               |                            |                                               |                     |                          |                                        
|Balance as of December 31, 2007                             |                           |               |                            | 18,312,245                                    |                     |                          | 106                                    

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

F - 7

---

---

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

|                                                     | Number of
ordinary
shares | Share
capital | Additional
paid-in
capital | Accumulated
other
comprehensive
income (loss) | Accumulated
deficit | Total
comprehensive
loss | Total
shareholders'
equity
(deficiency)
|---------------------------------------------------- | ------------------------- | ------------- | -------------------------- | --------------------------------------------- | ------------------- | ------------------------ | ---------------------------------------
|
|
|
|
|Issuance of shares, net of issuance cost of $32      |                           |               |                            | 5,011,841                                     |                     |                          | 28                                     
|Exercise of stock options                            |                           |               |                            | 1,250                                         |                     |                          | *) -                                   
|Exercise of Restricted share units                   |                           |               |                            | 12,000                                        |                     |                          | *) -                                   
|Cashless exercise of warrants (see Note 15d)         |                           |               |                            | 6,668                                         |                     |                          | *) -                                   
|Stock-based compensation                             |                           |               |                            | -                                             |                     |                          | -                                      
|Comprehensive loss:                                  |                           |              
|Unrealized loss on available-for-sale marketable     |                           |              
|securities                                           |                           |               |                            | -                                             |                     |                          | -                                      
|Unrealized loss on foreign currency cash flow hedges |                           |              
|transactions                                         |                           |               |                            | -                                             |                     |                          | -                                      
|Net loss                                             |                           |               |                            | -                                             |                     |                          | -                                      
|                                                     |                           |               |                            |                                               |                     |                          |                                        
|                                                     |                           |              
|Total comprehensive loss                             |                           |               |                            |                                               |                     |                          |                                        
|                                                     |                           |               |                            |                                               |                     |                          |                                        
|Balance as of December 31, 2008                      |                           |               |                            | 23,344,004                                    |                     | $                        | 134                                    
|                                                     |                           |               |                            |                                               |                     |                          |                                        

*) Less than $ 1.

Accumulated other comprehensive loss

|                                                                 | Year ended December 31,
|---------------------------------------------------------------- | -----------------------
|
|
|
|
|Accumulated unrealized loss on available-for-sale marketable     |                        
|securities                                                       |                        
|Accumulated unrealized loss on foreign currency cash flow hedges |                        
|                                                                 |                        
|Accumulated other comprehensive loss                             |                        
|                                                                 |                        

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

F - 8

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---

|                                                                        
|------------------------------------------------------------------------
|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|                                                                        
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                   
|                                                                        
|U.S. dollars in thousands                                               

|                                                                   | Year ended December 31,
|------------------------------------------------------------------ | -----------------------
|
|
|
|
|Cash flows from operating activities:                              |                        
|Net loss                                                           |                        
|Adjustments to reconcile net loss to net cash used in operating    |                        
|activities:                                                        |                        
|Depreciation and amortization                                      |                        
|In-process research and development charge                         |                        
|Accumulated interest and accretion of discount and premium on      |                        
|marketable securities                                              |                        
|Realized loss related to sale of marketable securities             |                        
|Accrued interest and revaluation to fair value of Redeemable       |                        
|Preferred Shares in EZchip Technologies                            |                        
|Accrued severance pay, net                                         |                        
|Amortization of discount on long-term loan                         |                        
|Stock-based compensation related to options granted to employees   |                        
|of the Company and EZchip Technologies                             |                        
|Minority interest in loss of EZchip Technologies                   |                        
|Change in fair value of warrants to Redeemable Preferred Shares    |                        
|Increase in trade receivables, net                                 |                        
|Write down of bad debt                                             |                        
|Decrease (increase) in other accounts receivable and prepaid       |                        
|expenses                                                           |                        
|Decrease (increase) in inventory                                   |                        
|Increase (decrease) in trade payables                              |                        
|Increase in other accounts payable and accrued expenses            |                        
|                                                                   |                        
|                                                                   |                        
|Net cash provided by (used in) operating activities                |                        
|                                                                   |                        
|                                                                   |                        
|Cash flows from investing activities:                              |                        
|Investment in available-for-sale marketable securities             |                        
|Proceeds from sale and redemption of available-for-sale marketable |                        
|securities                                                         |                        
|Purchase of property and equipment                                 |                        
|Proceeds from sale of property and equipment                       |                        
|                                                                   |                        
|                                                                   |                        
|Net cash used in investing activities                              |                        
|                                                                   |                        

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

F - 9

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---

|                                                                        
|------------------------------------------------------------------------
|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|                                                                        
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                   
|                                                                        
|U.S. dollars in thousands                                               

|                                                                         | Year ended December 31,
|------------------------------------------------------------------------ | -----------------------
|
|
|
|
|Cash flows from financing activities:                                    |                        
|Issuance of shares, net                                                  |                        
|Proceeds from exercise of options in the Company                         |                        
|Proceeds from exercise of options in EZchip Technologies                 |                        
|Proceeds from exercise of options in EZchip Technologies in              |                        
|connection with Share Purchase transaction                               |                        
|Proceeds from exercise of warrants for Redeemable Preferred              |                        
|Shares in EZchip Technologies                                            |                        
|Proceeds from long-term loan                                             |                        
|Repayment of long-term loan                                              |                        
|                                                                         |                        
|                                                                         |                        
|Net cash provided by financing activities                                |                        
|                                                                         |                        
|                                                                         |                        
|Increase (decrease) in cash and cash equivalents                         |                        
|Cash and cash equivalents at the beginning of the year                   |                        
|                                                                         |                        
|                                                                         |                        
|Cash and cash equivalents at the end of the year                         |                        
|                                                                         |                        
|                                                                         |                        
|Supplemental disclosure of cash flows activities:                        |                        
|Cash paid during the year for:                                           |                        
|Interest on long term loan                                               |                        
|                                                                         |                        
|                                                                         |                        
|a. Non-cash activities:                                                  |                        
|                                                                         |                        
|EZchip Technologies shares acquisition (see Note 3):                     |                        
|EZchip Technologies' tangible assets acquired by the Company             |                        
|Intangible assets acquired:                                              |                        
|Existing technology                                                      |                        
|Backlog                                                                  |                        
|Customer relationships                                                   |                        
|Goodwill                                                                 |                        
|In-process research and development                                      |                        
|                                                                         |                        
|                                                                         |                        
|Value of EZchip Technologies' shares acquired                            |                        
|                                                                         |                        
|                                                                         |                        
|Reclassification of Redeemable Preferred Shares to Preferred Shares      |                        
|in EZchip Technologies upon shares acquisition transaction (see Note 2j) |                        
|                                                                         |                        

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

F - 10

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---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

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

| | a. | EZchip
Semiconductor Ltd. (formerly LanOptics Ltd.) (the Company)           was
incorporated as a limited liability company under the laws of the State of
          Israel in 1989.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 22, 2008, the Company changed its name from LanOptics Ltd. to EZchip Semiconductor
Ltd. The Company, through its business unit EZchip Technologies Ltd., is a fabless
semiconductor company that develops and markets Ethernet network processors for
networking equipment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | EZchip
Technologies network processors provide the flexibility and integration that enable
triple-play data, voice and video services in access, metro and edge systems that make up
the new Carrier Ethernet networks. The architecture and features of EZchip Technologies products
offer the flexibility, scalability and price performance that are sought by
communications equipment vendors and are ideal for building systems for a wide range of
applications in telecom networks, enterprise backbones and data centers.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | EZchip
Technologies was established in December 1999 as a wholly-owned subsidiary of the
Company. Over the years, EZchip Technologies raised funds from third party investors and
the Company, thereby diluting the Companys ownership of EZchip Technologies.
However, following a series of share acquisition transactions, as detailed in Note 3,
as of December 31, 2008, the Company holds 99% of EZchip Technologies shares and
voting rights. During 2001, EZchip Technologies established a wholly-owned subsidiary,
EZchip Inc., in the United States, which is engaged in the marketing of EZchip
Technologiesproducts.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The
Companys Ordinary Shares were listed on the NASDAQ Global Market under
          the symbol LNOP from its initial public offering in November 1992
          until April 14, 2003, at which date the listing of its Ordinary Shares was
          transferred to the NASDAQ Capital Market. Since January 4, 2008, the
          Companys Ordinary Shares have been listed once again on the NASDAQ Global
          Market and on January 17, 2008 its NASDAQ ticker symbol changed to
          EZCH. Since April 1, 2002, the Companys Ordinary Shares have
          also been traded on the Tel Aviv Stock Exchange.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
 consolidated  financial  statements  were prepared in accordance  with  generally
 accepted  accounting               principles in the United States ("U.S. GAAP").
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Use
of estimates:
| | -- | -----------------

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

| | b. | Financial
statements in U.S. dollars:
| | -- | -------------------------------------

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

F - 11

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---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

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

| | b. | Financial
statements in U.S. dollars (cont.):
| | -- | ---------------------------------------------

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

| | c. | Basis
of consolidation:
| | -- | -----------------------

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

| | d. | Cash
equivalents:
| | -- | -----------------

| | The
Company considers all highly liquid investments that are convertible to cash with
original maturities of three months or less as cash equivalents.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Marketable
securities:
| | -- | ----------------------

| | The
Company accounts for its investments in marketable securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. The
Company determines the classification of marketable securities at the time of purchase
and reevaluates such designations as of each balance sheet date. The Company classifies
all of its marketable securities as available-for-sale. Available-for-sale marketable
securities are carried at fair value, with the unrealized gain and loss reported as a
separate component of shareholders equity (deficiency), accumulated other
comprehensive income (loss). Realized gain and loss on sales of marketable securities are
included in the Companys statements of operations and are derived using the
specific identification basis for determining the cost of marketable securities. The
amortized cost of marketable securities is adjusted for amortization of premiums and
accretion of discount to maturity. Such amortization, together with interest on
marketable securities, is included in the financial income (expenses), net.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the Companys policy and FASB Staff Position (FSP) Nos.
FAS 115-1 (FSP 115-1) and SFAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments, the
Company recognizes an impairment charge when a decline in the fair value of its
marketable securities below the cost basis is judged to be other-than-temporary. The
Company considers various factors in determining whether to recognize an impairment
charge, including the Companys intent and ability to hold the marketable securities
for a period of time sufficient to allow for any anticipated recovery in market value,
the length of time and extent to which the fair value has been less than the cost basis,
the credit ratings of the marketable securities and the financial condition and near-term
prospects of the issuers. If, after consideration of all available evidence to evaluate
the realizable value of its marketable securities, impairment is determined to be
other-than-temporary, then an impairment loss should be recognized equal to the
difference between the marketable securities carrying amount and its fair value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

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---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

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

| | f. | Inventories:
| | -- | ------------

| | Inventories
are stated at the lower of cost or market value. Inventory write-offs are provided for
slow-moving items or technological obsolescence. As of December 31, 2008, no inventory
write offs were recorded.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
is determined as follows: Raw materials  using the weighted average method.
| | ---------------------------------------------------------------------------------

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

| | g. | Property
and equipment:
| | -- | -----------------------

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

| | The
annual depreciation rates are as follows:
| | ---------------------------------------------

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

| | h. | Impairment
of long-lived assets:
| | -- | --------------------------------

| | The
Companys long-lived assets and certain identifiable intangibles are reviewed for
impairment in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets, whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value less costs
to sell. During the years 2008, 2007 and 2006, no impairment losses were identified.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

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

| | i. | Goodwill
and intangible assets:
| | -- | -------------------------------

| | Goodwill
reflects the excess of the purchase price of an acquired business over the fair value of
net assets acquired.
| | ----------------------------------------------------------------------------------------------------------------------

| | The
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (SFAS No. 142). Under SFAS No. 142, goodwill is
not amortized but instead is tested for impairment at least annually (or more frequently
if impairment indicators arise). The Company determined December 31 as the date of the
annual impairment test. The Company operates in one operating segment and such segment
comprises its only reporting unit.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 142 prescribes a two-phase process for impairment testing of goodwill. The first
phase screens for impairment, while the second phase (if necessary) measures impairment.
In the first phase of impairment testing, goodwill attributable to the reporting unit is
tested for impairment by comparing the fair value of the reporting unit with its carrying
value. During the years 2008, 2007 and 2006, no impairment losses were found (see also
Note 11).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Intangible
assets are amortized over their useful lives which is up to five years, using a method of
amortization that reflects the pattern in which the economic benefits of the intangible
assets are consumed or otherwise used up, in accordance with SFAS No. 144. The weighted
average amortization period as of December 31, 2008 is approximately 3 years (see also
Note 10).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. | Preferred
Shares in EZchip Technologies:
| | -- | ----------------------------------------

| | From
2000 through 2006, EZchip Technologies financed its operations with third party
investments and contributions from the Company. In consideration for their investment,
the third party investors and the Company received Preferred Shares and Redeemable
Preferred Shares of EZchip Technologies. The Preferred Shares reflected the original per
share issue price and the Redeemable Preferred Shares reflected the greater of (a) the
original per share issue price plus an amount equal to any accrued and unpaid dividends
thereon plus a 6% coupon interest compounded annually and (b) the fair market value of
such Redeemable Preferred Shares.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | From
2003 through 2008, the Company entered into a series of transactions with EZchip
Technologies other shareholders in order to increase the Companys interest in
EZchip Technologies. Commencing December 22, 2006, following the completion of one of
such transactions (see also Note 3), the Company became the owner of a majority of the
Redeemable Preferred Shares, resulting in the Company controlling the ability of the
holders to redeem the Redeemable Preferred Shares.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Preferred Shares in EZchip Technologies in the balance sheet reflects the minority
interest in EZchip Technologies.
| | -----------------------------------------------------------------------------------------------------------------------

| | For
the year ended December 31, 2006 (with respect to the period until December 22, 2006),
the Company recorded an accretion of $2,649 to the redemption value of EZchip Technologies Redeemable
Preferred Shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 22, 2008, the Company owns all of EZchip Technologies outstanding
Redeemable Preferred Shares and Preferred Shares (see Note 3).
| | -----------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

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

| | k. | Research
and development costs:
| | -- | -------------------------------

| | Research
and development costs net of participation and grants from the Office of the Chief
Scientist of the Ministry of Industry, Trade and Labor of Israel (the OCS)
are charged to expenses as incurred.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Severance
pay:
| | -- | --------------

| | The
liability of the Company and EZchip Technologies for severance pay is calculated pursuant
to Israels Severance Pay Law based on the most recent salary of the employees
multiplied by the number of years of employment, as of the balance sheet date and is
presented on an undiscounted basis. Employees are entitled to one months salary for
each year of employment or a portion thereof. The liability for all of the employees is
fully provided by monthly deposits with insurance policies and by an accrual. The value
of these policies is recorded as an asset in the Companys balance sheet. The
deposited funds may be withdrawn only upon the fulfillment of the obligation, pursuant to
the Severance Pay Law or labor agreements. The value of the deposited funds is based on
the cash surrendered value of these policies.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
expenses for the years ended December 31, 2008, 2007 and 2006 were $800, $407 and $329,
respectively.
| | ---------------------------------------------------------------------------------------------------------------

| | m. | Income
taxes:
| | -- | -------------

| | The
Company and its subsidiaries account for income taxes in accordance with SFAS No.109,
Accounting for Income Taxes (SFAS No. 109). This Statement
prescribes the use of the liability method whereby deferred tax assets and liability
account balances are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company and its
subsidiaries provide a valuation allowance to reduce deferred tax assets to their
estimated realizable value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is to evaluate
the tax position taken or expected to be taken in a tax return by determining if the
weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes. The second step is
to measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. The Company recognizes interest and penalties, if any,
related to unrecognized tax benefits in its provision for income tax. As a result of the
implementation of FIN 48, the Company recognized an increase of approximately $222 in the
liability for unrecognized tax benefits, which was accounted for as an increase to the
January 1, 2007 balance of the accumulated deficit (see Note 17a).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

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

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

| | n. | Net
loss per share:
| | -- | -------------------

| | Basic
net loss per share is computed based on the weighted average number of Ordinary Shares
outstanding during each year. Diluted net loss per share is computed based on the
weighted average number of Ordinary Shares outstanding during each year, plus dilutive
potential Ordinary Shares considered outstanding during the year, in accordance with
Statement of Financial Accounting Standard No. 128 Earnings Per Share (SFAS
No. 128).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the years ended December 31, 2008, 2007 and 2006, all outstanding stock options,
restricted share units and warrants have been excluded from the calculation of the
diluted net loss per share because all such stock options were anti-dilutive. The total
weighted average number of Ordinary Shares related to options, warrants and restricted
share units excluded from the calculation of diluted net loss per share were 2,210,800,
783,300 and 813,952 for the years ended December 31, 2008, 2007 and 2006, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Accounting
for stock based compensation:
| | -- | ----------------------------------------

| | On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), which requires the measurement and
recognition of compensation expense based on estimated fair values for all stock-based
payment awards made to employees and directors. SFAS No. 123(R) supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB
No. 25), for periods beginning in fiscal year 2006. In March 2005, the Securities
and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107)
relating to SFAS No. 123(R). The Company has applied the provisions of SAB 107 in its
adoption of SFAS No. 123(R).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 123(R) requires companies to estimate the fair value of equity-based payment awards
on the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the requisite
service period in the Companys consolidated statement of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expenses for the value of its awards granted based on the
straight line method over the requisite service period of each of the awards, net of
estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. Estimated forfeitures are based on actual historical pre-vesting
forfeitures and Companys expected pre-vesting forfeitures in future periods.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company selected the Black-Scholes-Merton option pricing model as the most appropriate
fair value method for its stock-options awards and values restricted share units based on
the market value of the underlying shares at the date of grant. The option-pricing model
requires a number of assumptions, of which the most significant are the expected stock
price volatility and the expected option term. Expected volatility was calculated based
upon actual historical stock price movements. The expected term of options granted is
calculated in accordance with the provisions of SAB 107 as amended and replaced by
SAB110. The risk-free interest rate is based on the yield from U.S. treasury bonds with
an equivalent term. The Company has historically not paid dividends and has no intention
to pay dividends in the foreseeable future.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

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

| | o. | Accounting
for stock-based compensation (cont.):
| | -- | ------------------------------------------------

| | The
expected life of options granted is calculated using the Simplified Method, as defined in
Staff Accounting Bulletin No 107, Share-Based Payments (SAB 107),
as the average between the vesting period and the contractual life of the options. On
December 21, 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (SAB 110),
which effective January 1, 2008, amends and replaces SAB 107.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company currently uses the simplified method as adequate historical experience is not
available to provide a reasonable estimate. The Company adopted SAB 110 effective January 1,
2008 and will continue to apply the simplified method until enough historical experience
is available to provide a reasonable estimate of the expected term for stock option
grants.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent
term to the expected life of the options. The Company has historically not paid dividends
and has no intention to pay dividends in the foreseeable future.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Revenue
recognition:
| | -- | --------------------

| | The
Company generates its revenues mainly from sales of network processors chips and to a
lesser extent from the sales of network-processor based systems, software tools and
maintenance and support services, through EZchip Technologies and its wholly owned
subsidiary EZchip Inc.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from network processors chips and network-processor based systems are recognized upon
delivery in accordance with Staff Accounting Bulletin No. 104 Revenue Recognition (SAB
104), when persuasive evidence of an agreement exists, delivery of the product has
occurred, the fee is fixed or determinable and collectability is probable. The Company
does not have any significant obligations after delivery. The Company does not grant a
right of return to its customers. In addition if a transaction sale does not meet all the
criteria, the revenue is deferred until all criteria are met.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from sales of software tools and maintenance and support services that are sold
separately from other products are recognized in accordance with Statement of Position
97-2, Software Revenues Recognition (SOP 97-2). The Company uses
the residual method when vendor specific objective evidence (VSOE)
of fair value only exists for the maintenance.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Deferred
revenues include unearned amounts received from maintenance and support services and
amounts received from customers but not yet recognized as revenues.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2006, the Company signed a collaboration agreement with Marvell Technology Group Ltd. (Marvell).
According to the agreement, Marvell will manufacture and sell a customized version of the
Companys NP-3 network processor to a specified customer and will pay the Company
royalties for each chip it sells to the customer.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

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

| | p. | Revenue
recognition (cont):
| | -- | ---------------------------

| | In
accordance with the Companys agreement with Marvell, Marvell sends the Company
royalty reports, once a month, which reflect sales made by it in the prior month.
Accordingly, the Company recognizes royalty revenue in the month that follows the month
in which the sales are made by Marvell.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Advertising
expenses:
| | -- | ---------------------

| | Advertising
expenses are charged to the statement of operations, as incurred. Advertising expenses
for the years ended December 31, 2008, 2007 and 2006 amounted to $92, $107 and $132,
respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Concentrations
of credit risk:
| | -- | ------------------------------

| | Financial
instruments that subject the Company to concentrations of credit risk consist primarily
of cash and cash equivalents, investments in marketable securities and trade receivables.
The Company invests only in highly rated financial instruments and maintains its cash
equivalents, and available-for-sale marketable securities with fixed income, money market
funds and treasury bills with high quality institutions. Deposits held with banks may
exceed the amount of insurance limits provided on such deposits.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | s. | Fair
value of financial instruments:
| | -- | ------------------------------------

| | The
carrying amounts of our financial instruments, including cash and cash equivalents,
short-term deposits, trade receivable, trade payable and other accounts payable and
accrued liabilities, approximate fair value because of their generally short term
maturities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements, and
effective October 10, 2008, adopted FSP No. SFAS 157-3, Determining the Fair Value
of a Financial Asset When the Market for That Asset Is Not Active, except as it
applies to the nonfinancial assets and nonfinancial liabilities subject to FSP 157-2.
SFAS 157 clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in pricing
an asset or a liability. As a basis for considering such assumptions, SFAS 157
establishes a three-tier value hierarchy, which prioritizes the inputs used in the
valuation methodologies in measuring fair value:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level
1  Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets.
| | --------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

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

| | s. | Fair
value of financial instruments (cont.):
| | -- | --------------------------------------------

| | Level
2  Include other inputs that are directly or indirectly observable in the
marketplace.
| | ---------------------------------------------------------------------------------------------

| | Level
3  Unobservable inputs, which are supported by little or no market activity.
| | -----------------------------------------------------------------------------------

| | The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | t. | Royalty-bearing
grants:
| | -- | -----------------------

| | Royalty-bearing
grants from the OCS for funding approved research and development projects are recognized
at the time EZchip Technologies is entitled to such grants, on the basis of the costs
incurred and included as a reduction of research and development costs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is obligated to pay royalties to the OCS calculated at the rate of 3%-4.5% of
sales of the products developed with the OCSs participation up to 100% of the
grants received linked to the U.S. dollar bearing annual interest at a rate of LIBOR. The
obligation to pay these royalties is contingent on actual sales of the products, and in
the absence of such sales payment of royalties is not required.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
the payment of royalties is not probable when the grants are received, the Company
records a liability in the amount of the royalties for each individual contract when the
related revenues are recognized. In the case of failure of a project that was partly
financed by the OCS, the Company will not be obligated to pay any such royalties.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008 and 2007, the Company accrued royalties pursuant to the OCS program
in the amount of $42 and $14, respectively. Royalty expenses are recorded as part of cost
of revenues (see also Note 14b).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Comprehensive
income (loss):
| | -- | ----------------------------

| | The
Company accounts for comprehensive income (loss) in accordance with SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for the reporting and
display of comprehensive income (loss) and its components in a full set of general
purpose financial statements. Comprehensive income (loss) generally represents all
changes in shareholders equity during the period. The Company determined that its
items of other comprehensive income (loss) relates to unrealized gain and loss on
available for sale marketable securities, realized loss on available for sale securities
and unrealized loss on foreign currency cash flow hedge.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

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

| | v. | Derivatives
and hedging:
| | -- | ------------------------

| | The
Company accounts for derivatives and hedging based on Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS
No. 133). SFAS No. 133 requires the Company to recognize all derivatives on the
balance sheet at fair value. If the derivative meets the definition of a cash flow hedge
and is so designated, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities through statements of
operations, or recognized in other comprehensive income (loss) until the hedged item is
recognized in statements of operations. The ineffective portion of a derivatives
change in fair value is recognized in statements of operations depending on the exposure
being hedged.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Commencing
2008, the Company entered into forward and option contracts to hedge the cash flows of
payroll and payroll related expenses denominated in New Israeli Shekels. As of December
31, 2008, the Company had outstanding forward contracts in the amount of $4,700 and
outstanding option contracts in the amount of $3,600. These contracts are for a period of
up to 12 months. The Company measured the fair value of the contracts in accordance with
SFAS No. 157 at level 2. The Companys net loss of $196 was reclassified out of the
other comprehensive loss and was recognized in the Companys statements of
operations during 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the year ended December 31, 2008, the unrealized loss on foreign currency cash flow
hedges amounted to $23. This unrealized loss is included in the Companys
accumulated other comprehensive loss.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | w. | Impact
of recently issued accounting standards:
| | -- | -----------------------------------------------

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

| | In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non controlling interest in the acquiree and the goodwill
acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of
the nature and financial effects of the business combination. SFAS 141R is effective for
fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The
adoption of SFAS 141(R) is not expected to have a material effect on current investments
in the Companys consolidated financial statements since the pronouncement is
effective only for business combinations executed after January 1, 2009
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

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

| | w. | Impact
of recently issued accounting standards (cont.):
| | -- | -------------------------------------------------------

| | In
February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2, Effective
Date of FASB Statement No. 157 (FSP FAS 157-2), to delay the effective
date of FASB Statement 157 for one year for certain nonfinancial assets and nonfinancial
liabilities, excluding those that are recognized or disclosed in financial statements at
fair value on a recurring basis (that is, at least annually). For purposes of applying
the FSP FAS 157-2, nonfinancial assets and nonfinancial liabilities include all assets
and liabilities other than those meeting the definition of a financial asset or a
financial liability in FASB Statement 159. FSP FAS 157-2 defers the effective date of
Statement 157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of this FSP FAS 157-2. The Company
does not expect the adoption of FAS 157 for the certain nonfinancial assets and
nonfinancial liabilities, excluding those that are recognized or disclosed in the
financial statements at fair value on a recurring basis, to have a material impact on its
financial position, statements of operations or cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2008, the FASB issued Statement 161 Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161), an amendment to FASB No. 133. This
statement changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect
an entitys financial position, financial performance, and cash flows. This
statement is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Early application is encouraged. The Company
does not expect the adoption of SFAS 161 to have an impact on its financial position,
statements of operations or cash flows.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of
the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement No. 142, Goodwill and
Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years beginning
after December 15, 2008 and early adoption is prohibited. The adoption of FAS 142-3 is
not expected to have a material effect on the Companys consolidated financial
statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2008, the FASB issued FSP EITF No. 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities. Under
the FSP, unvested share-based payment awards that contain rights to receive
non-forfeitable dividends (whether paid or unpaid) are participating securities, and
should be included in the two-class method of computing EPS. The FSP is effective for
fiscal years beginning after December 15, 2008, and interim periods within those
years, and is not expected to have a material effect on the Companys consolidated
financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

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

| | w. | Impact
of recently issued accounting standards (cont.):
| | -- | -------------------------------------------------------

| | In
December 2007, the Financial Accounting Standards Board ratified a consensus opinion
reached by the Emerging Issues Task Force (EITF) on EITF Issue 07-1, Accounting
for Collaborative Arrangements (EITF 07-1). The guidance in EITF 07-1
defines collaborative arrangements and establishes presentation and disclosure
requirements for transactions within a collaborative arrangement (both with third parties
and between participants in the arrangement). The consensus in EITF 07-1 is effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15,
2008. The consensus requires retrospective application to all collaborative arrangements
existing as of the effective date, unless retrospective application is impracticable. The
impracticability evaluation and exception should be performed on an
arrangement-by-arrangement basis. The adoption of EITF 07-1 is not expected to have a
material effect on the Companys consolidated financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2008, the FASB issued EITF No. 07-5 Determining whether an Instrument (or
Embedded Feature) is indexed to an Entitys Own Stock (EITF 07-5).
EITF 07-5 is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early application is
not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to the Companys
own stock and (b) classified in stockholders equity in the statement of
financial position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial instrument
or an embedded feature is indexed to an issuers own stock and thus able to qualify
for the SFAS 133 paragraph 11(a) scope exception. The adoption of EITF 07-5 is not
expected to have a material effect on the Companys consolidated financial
statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

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

|NOTE 3: |  | INVESTMENT IN EZCHIP TECHNOLOGIES
|------- | - | ---------------------------------

| | EZchip
Technologies was established in December 1999 as a wholly-owned subsidiary of the
Company. From 2000 through 2006, EZchip Technologies raised funds from third party
investors and the Company, thereby diluting the Companys ownership of EZchip
Technologies.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Commencing
in 2003, the Company entered into a series of exchange transactions with EZchip
Technologies other shareholders in order to increase the Companys ownership
interest in EZchip Technologies until such time as EZchip Technologies is wholly-owned by
the Company again. Pursuant to the exchange transactions, the Company issued to the third
party investors Ordinary Shares of the Company in exchange for such third party investors shares
in EZchip Technologies.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total fair values of the Ordinary Shares issued by the Company in each of the exchange
transactions was based on the average share prices of the Companys Ordinary Shares
two days before and two days after the announcement of the applicable exchange
transaction.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Each
of the exchange transactions was accounted for according to the purchase method of
accounting in accordance with SFAS No. 141. Accordingly, the respective purchase prices
were allocated to the assets acquired and liabilities assumed based upon their estimated
fair values on the respective dates of acquisition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the exchange transactions, as of December 31, 2008, the Company holds 99% of EZchip
Technologies outstanding shares and voting rights.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| | The
exchange transactions for the years 2006, 2007 and 2008 were as follows:
| | ----------------------------------------------------------------------------

| | a) | On
December 22, 2006, the Company acquired 4,166,666 Preferred A Shares,           1,106,194
Preferred B Shares and 7,909,811 Redeemable Preferred C Shares of           EZchip
Technologies in consideration of the issuance of 3,521,566 Ordinary           Shares of
the Company. On December 22, 2006, the Company also acquired from the           Lenders
(as described in Note 13 below) 1,369,507 Redeemable Preferred C Shares           of
EZchip Technologies in consideration of the issuance of 356,669 Ordinary           Shares
of the Company. The total fair value of the Ordinary Shares issued in the
          acquisition was $55,672 based on the average share prices of the Companys
          Ordinary Shares two days before and two days after the announcement of the
          acquisition.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | In
August 2007, the Company offered current and former employees of EZchip
          Technologies that held ordinary shares of EZchip Technologies and options to
          purchase ordinary shares of EZchip Technologies, to purchase a portion of their
          EZchip Technologies ordinary shares (including those resulting from the
exercise           of options). As a result, during August and September 2007, the
Company acquired           4,374,458 ordinary shares of EZchip Technologies for a total
consideration of           $17,887.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | On
January 22, 2008, the Company acquired the remaining 4,588,655 Preferred B
          Shares and 12,555,993 Redeemable Preferred C Shares of EZchip Technologies, in
          consideration of the issuance of 5,011,841 Ordinary Shares of the Company. The
          acquired shares represented all the remaining preferred shares held by minority
          shareholders of EZchip Technologies. The total fair value of the Company
          Ordinary Shares issued in the acquisition was $82,679 based on the average
share           prices of the Companys Ordinary Shares two days before and two days
after           the announcement of the transaction.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

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---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 3: |  | INVESTMENT IN EZCHIP TECHNOLOGIES (CONT.)
|------- | - | -----------------------------------------

| | The
purchase price allocations are as follows:
| | ----------------------------------------------

| | Purchase price allocation                      | January 22,
2008 | September 23,
2007 | December 22,
2006
| | ---------------------------------------------- | ---------------- | ------------------ | -----------------
|
|
|
|
| | EZchip Technologies' tangible assets acquired: |                  |                    | $                
| | Intangible assets acquired:                    |                  |                   
| | In-process research and development (1)        |                  |                    |                  
| | Existing technology (2)                        |                  |                    |                  
| | Backlog (3)                                    |                  |                    |                  
| | Customer relationships (4)                     |                  |                    |                  
| | Goodwill (5)                                   |                  |                    |                  
| |                                                |                  |                    |                  
| | Total consideration                            |                  |                    | $                
| |                                                |                  |                    |                  

| | (1) | The
Company recorded an in-process research and development charge for
          projects which, as of the applicable transaction date, had not yet reached
          technological feasibility and which had no alternative future use.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Existing
technology is amortized using the straight-line method over its useful           life,
which is up to four years.
| | --- | --------------------------------------------------------------------------------------------------------------------------

| | (3) | Backlog
is amortized according to a shipment schedule.
| | --- | ------------------------------------------------------

| | (4) | Customer
relationships are amortized over their useful life, which is up to           five years.
| | --- | -------------------------------------------------------------------------------------------------

| | (5) | Goodwill
represents the excess of the purchase price over the fair value of the           net
assets acquired. Goodwill is not amortized and is tested for impairment at
          least annually.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

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---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 4: |  | MARKETABLE SECURITIES
|------- | - | ---------------------

| | As
of December 31, 2008 and 2007 all of the Companys marketable securities were
classified as available-for-sale.
| | ------------------------------------------------------------------------------------------------------------------

|                         | December 31, 2008 | December 31, 2007
|------------------------ | ----------------- | -----------------
|
|
|
|
|Available-for-sale -     |                   |                  
|matures within one year: |                   |                  
|Corporate debentures -   |                   |                  
|fixed interest rate      |                   |                  
|                         |                   |                  
|                         |                   |                  
|Available-for-sale -     |                   |                  
|matures after one year   |                   |                  
|through three years:     |                   |                  
|Corporate debentures -   |                   |                  
|fixed interest rate      |                   |                  
|                         |                   |                  
|                         |                   |                  
|                         |                   |                  
|                         |                   |                  

| | For
the years ended December 31, 2008 and 2007, the net unrealized gain (loss) amounted to
$(671) and $8, respectively.
| | -----------------------------------------------------------------------------------------------------------------------

| | The
Company reviews various factors in determining whether it should recognize an impairment
charge for its marketable securities, including its intent and ability to hold the
marketable securities for a period of time sufficient for any anticipated recovery in
market value, the length of time and extent to which the fair value has been less than
its cost basis, the credit ratings of the marketable securities, the nature of underlying
collateral, as applicable and the financial condition and near-term prospects of the
issuer. Based on the Companys consideration of these factors, the unrealized loss
on marketable securities was not considered to be other-than-temporarily impaired at
December 31, 2008.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

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---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 5: |  | FAIR VALUE OF FINANCIAL INSTRUMENTS
|------- | - | -----------------------------------

| | In
accordance with SFAS 157, the Company measures its U.S. treasury bills, money market
funds marketable securities and foreign currency cash flow hedges transactions at fair
value. U.S. treasury bills and money market funds are classified within Level 1 because
they are valued using quoted market prices in an active market. Marketable securities and
foreign currency cash flow hedges transactions are classified within Level 2 because they
are valued using other inputs that are directly or indirectly observable in the
marketplace for similar investments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys financial assets and liabilities measured at fair value on a recurring
basis consisted of the following types of instruments as of December 31, 2008:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                     | Level 1 | Level 2
| | ------------------------------------------------------------------- | ------- | -------
|
|
|
|
| | U.S. Treasury Bills (included in Cash and cash equivalents balance) |         |        
| | Money Market Funds (included in Cash and cash equivalents balance)  |         |        
| | Corporate bonds                                                     |         |        
| | Foreign currency cash flow hedges                                   |         |        
| |                                                                     |         |        
| | Total                                                               |         |        
| |                                                                     |         |        

|NOTE 6: |  | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|------- | - | ----------------------------------------------

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
| | Government authorities         |             
| | Prepaid expenses               |             
| | Grants receivable from the OCS |             
| | Others                         |             
| |                                |             
| | Total                          |             
| |                                |             

|NOTE 7: |  | INVENTORIES
|------- | - | -----------

| |                   | December 31,
| | ----------------- | ------------
|
|
|
|
| | Raw materials     |             
| | Work in progress  |             
| | Finished products |             
| |                   |             
| | Total             |             
| |                   |             

F - 26

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---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 8: |  | PREPAID DEVELOPMENT AND PRODUCTION COSTS, NET
|------- | - | ---------------------------------------------

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

| | a) | Production:
Access to unique semiconductor communications cores and           technologies.
| | -- | -------------------------------------------------------------------------------------------

| | b) | Development:
IBM agreed to develop specialized high-performance embedded DRAM           cores, which
meet the requirements of EZchip Technologies 10-Gigabit           wire-speed
processing.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of these services was measured in accordance with EITF 96-18 Accounting
for Equity Investments That Are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling, Goods or Services (EITF 96-18) and recorded
as an asset in accordance with EITF 00-18 Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than Employees(EITF
00-18).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
ordinary shares of EZchip Technologies that were issued were valued in accordance with
EZchip Technologies fair value estimation at the date of this agreement.
Accordingly, prepaid costs totaling $2,134 were allocated between prepaid development
services of $1,500 and prepaid production services of $634. Development costs were
amortized upon achievement of milestones determined in the agreement. As of December 31,
2003 the development costs were fully amortized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | For
the years ended December 31, 2008, 2007 and 2006, amortization expenses related to the
production cost amounted to $98, $142 and $91, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

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---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 9: |  | PROPERTY AND EQUIPMENT, NET
|------- | - | ---------------------------

| |                                              | December 31,
| | -------------------------------------------- | ------------
|
|
|
|
| | Cost:                                        |             
| | Office furniture and equipment               |             
| | Computers, software and electronic equipment |             
| | Leasehold improvements                       |             
| |                                              |             
| | Total cost                                   |             
| |                                              |             
| |                                              |             
| | Accumulated depreciation:                    |             
| | Office furniture and equipment               |             
| | Computers, software and electronic equipment |             
| | Leasehold improvements                       |             
| |                                              |             
| | Total accumulated depreciation               |             
| |                                              |             
| |                                              |             
| | Depreciated cost                             |             
| |                                              |             

| | Depreciation
expenses for the years ended December 31, 2008, 2007 and 2006 amounted to $231, $265 and
$230, respectively.
| | -------------------------------------------------------------------------------------------------------------------------

|NOTE 10: |  | INTANGIBLE ASSETS, NET
|-------- | - | ----------------------

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
| | Cost:                          |             
| |                                |             
| | Existing technology            |             
| | Customer relationships         |             
| | Backlog                        |             
| |                                |             
| | Total cost                     |             
| |                                |             
| | Accumulated amortization:      |             
| | Existing technology            |             
| | Customer relationships         |             
| | Backlog                        |             
| |                                |             
| | Total accumulated amortization |             
| |                                |             
| | Amortized cost                 |             
| |                                |             

| | Amortization
expenses for the years ended December 31, 2008, 2007 and 2006 amounted to $2,558, $1,248
and $361, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------

| | Following
is the expected amortization expenses in respect of the Companys intangible assets:
| | ----------------------------------------------------------------------------------------------

| | Year ended December 31 | 
| | ---------------------- | 
|
|
|
|
| | 2009                   | 
| | 2010                   | 
| | 2011                   | 
| | 2012                   | 
| |                        | 
| | Total                  | 

F - 28

---

---

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

|NOTE 11: |  | GOODWILL
|-------- | - | --------

| | The
following table presents details of the Companys total goodwill:
| | ---------------------------------------------------------------------

| |                                                                                                     | 
| | --------------------------------------------------------------------------------------------------- | 
|
|
|
|
| | As of January 1, 2007                                                                               | 
| |                                                                                                     | 
| | Goodwill resulted from EZchip Technologies shares acquisition dated September 23, 2007 (see Note 3) | 
| |                                                                                                     | 
| | As of December 31, 2007                                                                             | 
| |                                                                                                     | 
| |                                                                                                     | 
| | Goodwill resulted from EZchip Technologies shares acquisition dated January 22, 2008 (see Note 3)   | 
| |                                                                                                     | 
| | As of December 31, 2008                                                                             | 
| |                                                                                                     | 

|NOTE 12: |  | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|-------- | - | -------------------------------------------

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
| | Employees and payroll accruals |             
| | Accrued expenses               |             
| | Prepayment of OCS grants       |             
| | Deferred revenues              |             
| |                                |             
| |                                |             
| |                                |             

|NOTE 13: |  | LONG-TERM LOAN, NET
|-------- | - | -------------------

| | In
August 2006, EZchip Technologies entered into a credit agreement with Plenus II, Limited
Partnership and Plenus II (D.C.M.), Limited Partnership, as lenders (together, the Lenders),
pursuant to which the Lenders agreed to make a $4.0 million line of credit available to
EZchip Technologies, which could be increased by an additional $2.0 million upon EZchip
Technologies achievement of certain milestones. Under the terms of the credit
agreement, EZchip Technologies was permitted to draw amounts under the line of credit
from time to time until August 2007, at which time the drawn and unpaid amount was fixed
and the revolving line of credit facility became a loan. The annual interest on the loan
was LIBOR+3% for the first two years and LIBOR+4.5% for the third year.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of this credit agreement, EZchip Technologies granted the Lenders a first ranking
floating charge on all of EZchip Technologies tangible and intangible assets and
rights to secure the loan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the credit agreement, the Company had a right to settle the loan principal amount in
an early repayment. As part of the credit agreement, EZchip Technologies issued to the
lenders 910,000 Series C Redeemable Preferred Shares. The Series C Redeemable Preferred
Shares were recorded at fair value and were presented as a discount on the loan in the
amount of $743. The discount on the loan was amortized according to the effective
interest method as financial expenses over the loan contractual life, which was three
years. The Company acquired these shares in December 22, 2006 in exchange for the Companys
Ordinary Shares (see Note 3).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 13: |  | LONG-TERM LOAN, NET (CONT.)
|-------- | - | ---------------------------

| | In
October 2007, EZchip Technologies repaid the loan in full in an early repayment, the
floating charge was removed and the outstanding discount amount was fully amortized at
that date as a financial expense.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 14: |  | COMMITMENTS AND CONTINGENT LIABILITIES
|-------- | - | --------------------------------------

| | a. | Lease
commitments:
| | -- | ------------------

| | The
Company and EZchip Technologies lease their facilities under operating lease agreements,
which will expire in January 2014 with monthly payments in the amount of $35. In the
event the Company will decide to terminate the operating lease agreement, it must provide
90 days prior notice. EZchip Inc. leases two offices in the U.S. under lease agreements,
which it renews every six months for a monthly payment of $7.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company leases motor vehicles under standard commercial operating leases.
| | -----------------------------------------------------------------------------

| | Aggregate
minimum lease commitments under cancelable operating leases as of December 31, 2008, are
as follows:
| | --------------------------------------------------------------------------------------------------------------

| | Year ended December 31, | 
| | ----------------------- | 
|
|
|
|
| | 2009                    | 
| | 2010                    | 
| | 2011                    | 
| | 2012                    | 
| | 2013                    | 
| | 2014                    | 
| |                         | 
| |                         | 
| |                         | 

| | Total
lease expenses for the Company and for its subsidiaries, for the years ended December 31,
2008, 2007 and 2006, amounted to $1,719, $1,354 and $1,187, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Royalties
commitments:
| | -- | ----------------------

| | EZchip
Technologies participates in programs sponsored by the OCS for the support of research
and development activities.
| | -------------------------------------------------------------------------------------------------------------------------

| | In
each of 2008, 2007 and 2006, EZchip Technologies received an approval from the OCS for
its participation in its research and development budgets. Pursuant to such programs, the
OCS participates in up to 50% of the approved budget for certain periods ending December
31, 2008.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the OCS participation, EZchip Technologies is obligated to pay royalties
to the OCS calculated at the rate of 3%-4.5% of sales of the products developed with the
OCSs participation up to 100% of the grants received linked to the U.S. dollar
bearing annual interest at a rate of LIBOR.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---

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

|NOTE 14: |  | COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
|-------- | - | ----------------------------------------------

| | As
of December 31,  2008,  the  cumulative  nominal  amount of royalty  bearing
 participations  received by               EZchip Technologies and the resulting
 contingent  obligation to pay royalties is $6,484. As of December 31,
              2008, the Company accrued and paid $121 on account of such OCS
participation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
 respect to royalties  paid for revenues  that the Company  derives from its  partnership
 with Marvell               (see also  Note 2p),  royalties  to the OCS will be
 calculated  based on  Marvell's  sale  price to its end               customer.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 15: |  | SHAREHOLDERS' EQUITY
|-------- | - | --------------------

| | a. | Company's
shares:
| | -- | -----------------

| | 1. | As
of December 31, 2008, the Company's  authorized  share capital  consists of NIS 1,000,000
 divided                      into  50,000,000  Ordinary  Shares,  par value NIS 0.02 per
share.  Ordinary  Shares  confer on their                      holders the right to
receive notice to participate and vote in general  meetings of the Company,  the
                     right to a share in the excess of assets upon  liquidation  of the
Company,  and the right to receive                      dividends, if declared.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | During
2008 and 2006, the Company issued 5,011,841 and 3,878,235  Ordinary Shares,
 respectively,  in                      connection with the acquisition of EZchip
Technologies shares (see also Note 3).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | During
 August  and  September  2007,  the  Company  issued  2,500,000   Ordinary  Shares  for
 total                      consideration  of $43,627,  less of issuance  costs of $150.
 A portion of the  proceeds  was used to                      increase the Company's
ownership interest in EZchip Technologies (see also Note 3).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 15: |  | SHAREHOLDERS' EQUITY (CONT.)
|-------- | - | ----------------------------

| | b. | Company's
stock option plans:
| | -- | -----------------------------

| | In
October  2003,  the Company  adopted the 2003 Israeli  Share Option Plan.  In December
 2006 the plan was               amended to reflect  the  possible  grants of  restricted
 share  units  ("RSUs")  and was renamed the EZchip               Semiconductor  Ltd.
 (formerly known as LanOptics Ltd) 2003 Amended and Restated Equity  Incentive Plan (the
              "2003 Israel  Plan").  The 2003 Israel Plan complies with Section 102 of
the Israeli  Income Tax  Ordinance,               which provides  certain tax benefits in
connection with stock-based  compensation to employees,  officer and
              directors.  Initially,  up to 1,770,000  Ordinary  Shares were  issuable
 under the 2003 Israel Plan,  which               amount is  reduced  by three  shares
for each RSU  granted  under the plan and by one share for each  option
              granted  under the plan.  In  addition,  pursuant to an  amendment  to the
2003 Israel Plan  approved by the               Company's  shareholders  in December
2007, on January 1st of each year,  commencing  January 1, 2009, to the
              extent the number of Ordinary Shares  reserved,  authorized and available
for issuance under the 2003 Israel               Plan on such date is less than 4% of the
number of  Ordinary  Shares  issued and  outstanding  on such date,               the
number of Ordinary  Shares  reserved,  authorized  and available for issuance under the
2003 Israel Plan               will  automatically  increase  on such  date to  equal  4%
of the  number  of  Ordinary  Shares  issued  and               outstanding  on such
date.  Following  the  automatic  increase on January 1, 2009,  up to 933,760  Ordinary
              Shares are reserved,  authorized  and available  for issuance  under the
2003 Israel Plan.  Awards under the               2003 Israel Plan are granted to Israeli
employees,  directors,  consultants,  advisers and service providers               of the
Company and its subsidiaries.  In accordance with the terms and conditions  imposed by
Section 102 of               the Israel  Income Tax  Ordinance,  grantees  who  receive
 options or RSUs under the 2003  Israel  Plan are               afforded  certain  tax
 benefits  (excluding  controlling  shareholders  of the Company or those who are not
              Israeli  employees,  directors,  consultants,  advisers  and  service
 providers  of  the  Company  and  its               subsidiaries).  Awards granted under
the 2003 Israel Plan have a maximum  exercise  period of ten years from               the
date of grant.  Awards  granted  under the 2003 Israel Plan are generally  exercisable
 over four years.               Shares  subject to awards that are not exercised and
forfeited will become  available for future grants.  As               of December 31,
2008,  options to purchase  1,550,250 Ordinary Shares and 15,750 RSUs were outstanding
under               the 2003 Israel Plan.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 27, 2007, the Company adopted the 2007 U.S.  Equity  Incentive Plan (the "2007
U.S.  Plan").  Up               to 500,000  Ordinary  Shares are issuable under the 2007
U.S. Plan,  which amount is reduced by three shares               for each RSU  granted
 under the plan and by one share for each option  that the  Company  grants  under the
              plan. Except as required to address specific U.S. tax requirements,  the
general terms and conditions of the               2007 U.S.  Plan are  substantially
 similar  to the terms and  conditions  of the 2003  Israel  Plan.  As of
              December 31, 2008, options to purchase 166,000 Ordinary Shares were
outstanding under the 2007 U.S. Plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 15: |  | SHAREHOLDERS' EQUITY (CONT.)
|-------- | - | ----------------------------

| | b. | Company's
stock option plans (cont.):
| | -- | -------------------------------------

| | Transactions
 related to the grant of options to employees  and  directors  under the above plans
during the               years ended December 31, 2008, 2007 and 2006, were as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                    | Year ended December 31,
| | ---------------------------------- | -----------------------
|
|
|
|
| | Outstanding at beginning of year   |                        
| |                                    |                        
| | Granted                            |                        
| | Exercised                          |                        
| | Forfeited                          |                        
| | Outstanding at end of year         |                        
| |                                    |                        
| | Exercisable options at end of year |                        
| |                                    |                        
| | Vested and expected to vest        |                        
| |                                    |                        

| | The
intrinsic value of exercisable options (the difference between the Companys closing
share price on the last trading day in fiscal 2008 and the exercise price, multiplied by
the number of in-the-money options) represents the amount that would have been received
by the option holders had all option holders exercised their options on December 31,
2008. This amount changes based on the fair market value of the Companys Ordinary
Shares. Total intrinsic value of outstanding options, exercisable options and vested and
expected to vest options as of December 31, 2008 was $3,413, $342 and $3,182 respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table summarizes information relating to awards of RSUs. No RSUs were granted
prior to 2007:
| | ----------------------------------------------------------------------------------------------------------

| |                                  | Year ended December 31, | Year ended December 31,
| | -------------------------------- | ----------------------- | -----------------------
|
|
|
|
| | Outstanding at beginning of year |                         |                        
| | Granted                          |                         |                        
| | Exercised                        |                         |                        
| | Forfeited                        |                         |                        
| |                                  |                         |                        
| |                                  |                         |                        
| | Outstanding at end of year       |                         |                        
| |                                  |                         |                        

| | Aggregate
intrinsic value, at the date of exercise, of options and restricted shares units that
were exercised during the year ended December 31, 2008 was $17 and $188, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 15: |  | SHAREHOLDERS EQUITY (CONT.)
|-------- | - | ----------------------------

| | b. | Companys
stock option plans (cont.):
| | -- | -------------------------------------

| | The
options outstanding as of December 31, 2008, grouped by exercise prices, were as follows:
| | ---------------------------------------------------------------------------------------------

| | Exercise price | Optionsoutstandingas ofDecember 31,2008 | Weightedaverage remainingcontractuallife years | Options
exercisable
as of
December 31,
2008 | Intrinsic
value as of
December 31,
2008
| | -------------- | --------------------------------------- | ---------------------------------------------- | ------------------------------------------- | ---------------------------------------
|
|
|
|
| | $2.88          |                                         |                                                |                                             | 3,000                                  
| | $6.93          |                                         |                                                |                                             | 5,000                                  
| | $10.33         |                                         |                                                |                                             | 28,500                                 
| | $12.23         |                                         |                                                |                                             | 81,000                                 
| | $13.90         |                                         |                                                |                                             | 1,272,050                              
| | $14.39         |                                         |                                                |                                             | 299,000                                
| | $15.19         |                                         |                                                |                                             | 21,000                                 
| | $16.62         |                                         |                                                |                                             | 6,700                                  
| |                |                                         |                                                |                                             |                                        
| |                |                                         |                                                |                                             | 1,716,250                              
| |                |                                         |                                                |                                             |                                        

| | The
following table illustrates the assumptions that had been used in calculating the fair
value for options granted by the Company during2007 and 2008. These options are amortized
over their vesting period:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                        | Year ended December 31,
| | ---------------------- | -----------------------
|
|
|
|
| | Dividend yield         | 0%                     
| | Expected volatility    | 60%                    
| | Risk-free interest     | 2.75%                  
| | Expected life of up to | 4.5 years              

| | The
expected annual pre-vesting forfeiture rate affects the number of exercisable options.
Based on the Companys historical experience, the annual pre-vesting forfeiture rate
is 3%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Weighted
average fair values on the date of grant of options granted for the year ended December
31, 2008 and 2007 were $7.06 and $5.63, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 15: |  | SHAREHOLDERS EQUITY (CONT.)
|-------- | - | ----------------------------

| | c. | Companys
and EZchip Technologies equity-based compensation:
| | -- | -------------------------------------------------------------

| | The
Company and EZchip Technologies aggregate stock-based compensation cost for the years
ended December 31, 2008, 2007 and 2006 totaled $3,134, $2,458 and $609, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total stock-based compensation expense related to all of the Companys and EZchip
Technologies stock-based compensation, recognized for years ended December 31,
2008, 2007 and 2006, was comprised as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                         | Year ended December 31,
| | --------------------------------------- | -----------------------
|
|
|
|
| | Costs of revenues                       |                        
| | Research and development expenses       |                        
| | Selling and marketing expenses          |                        
| | General and administrative expenses     |                        
| |                                         |                        
| | Total stock-based compensation expenses |                        
| |                                         |                        

| | As
of December 31, 2008, there was $9,047 of total unrecognized stock-based compensation
cost related to non-vested stock-based compensation granted under the Companys
stock option plans. That cost is expected to be recognized over a weighted average period
of 3.34 years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Warrants
issued for financing transaction
| | -- | -----------------------------------------

| | 1. | In
connection with an investment agreement the Company executed during December
          2003, the Company granted to an investor a five-year warrant to purchase
187,500           Ordinary Shares of the Company at an exercise price of $11.39 per
share. On           December 10, 2008 the investor exercised the warrant, by way of a
cashless           exercise, in accordance with the terms of the warrant. Based on the
closing           price of the Companys Ordinary Shares on December 10, 2008
($11.81 per           Ordinary Share), the cashless exercise of the warrant resulted in
issuing the           investor 6,668 Ordinary Shares of the Company.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
connection with an investment agreement the Company executed during November
          2004, the Company granted to an investor a five-year warrant to purchase
478,800           Ordinary Shares of the Company at an exercise price of $15.50 per
share. As of           December 31, 2008 such warrant was outstanding.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 16: |  | EZCHIP TECHNOLOGIES SHARES
|-------- | - | --------------------------

| | a. | EZchip
Technologies shares:
| | -- | ----------------------------

| | As
of January 22, 2008, the Company owns all the outstanding Preferred Shares of EZchip
Technologies and approximately 99% of the Ordinary Shares of EZchip Technologies (see
Note 3).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | EZchip
Technologies stock option plans:
| | -- | ---------------------------------------

| | EZchip
Technologies has granted options to purchase its ordinary shares to key employees,
shareholders and directors pursuant to the Israeli and the U.S. stock option plans (the
2000 Section 102 Share Option Plan, the 2003 Section 102 Share Option
Plan and the 2001 U.S. Stock Option Plan), as an incentive to attract
and retain qualified personnel. Under these plans a total of 16,500,000 ordinary shares
of EZchip Technologies were reserved and authorized for issuance. Under the terms of
these grants, options generally become exercisable over a four-year period, commencing
with the date of grant. The options generally expire seven to ten years from the date of
the grant and are non-transferable, except under the laws of succession.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the acquisitions (see also Note 3) by the Company of substantially all of EZchip
Technologies shares, as of December 2007, the Company discontinued its practice of
granting EZchip Technologies employees options to purchase shares of EZchip
Technologies pursuant to the EZchip Technologies option plans. Instead, all future
incentive awards to EZchip Technologies employees will consist of options or restricted
share units to purchase Ordinary Shares of the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table is a summary of activity for EZchip Technologies stock option
plans:
| | -----------------------------------------------------------------------------------------

| |                                    | Year ended December 31,
| | ---------------------------------- | -----------------------
|
|
|
|
| | Outstanding at beginning of year   |                        
| |                                    |                        
| | Granted                            |                        
| | Exercised                          |                        
| | Forfeited                          |                        
| |                                    |                        
| |                                    |                        
| | Outstanding at end of year         |                        
| |                                    |                        
| |                                    |                        
| | Exercisable options at end of year |                        
| |                                    |                        
| |                                    |                        
| | Vested and expected to vest        |                        
| |                                    |                        

| | In
May 2007, the Company granted certain employees 2,715,000 fully vested options to
purchase ordinary shares of EZchip Technologies to replace fully vested expiring options
that were not exercised by such employees prior to their respective expiration dates,
bearing the same exercise price as the applicable expiring option.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 16: |  | EZCHIP TECHNOLOGIES SHARES (CONT.)
|-------- | - | ----------------------------------

| | b. | EZchip
Technologies stock option plans (cont.):
| | -- | -----------------------------------------------

| | In
August 2007, the Company offered current and former employees of EZchip Technologies that
held ordinary shares of EZchip Technologies and options to purchase ordinary shares of
EZchip Technologies, to purchase a portion of their EZchip Technologies ordinary
shares (including those resulting from the exercise of options). As a result, during
August and September 2007, current and former employees of EZchip Technologies exercised
4,296,120 options to purchase ordinary shares of EZchip Technologies and the Company
acquired an aggregate of 4,374,458 ordinary shares of EZchip Technologies, including
4,296,120 ordinary shares of EZchip Technologies issued upon exercise of options by
current and former employees of EZchip Technologies, for a total consideration in the
amount of $17,887 (see also Note 3).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options outstanding as of December 31, 2008, have been separated into exercise prices as
follows:
| | -----------------------------------------------------------------------------------------------------

| | Exercise price | Optionsoutstandingas ofDecember 31,2008 | Weightedaverage remainingcontractuallife years | Options
exercisable
as of
December 31,
2008
| | -------------- | --------------------------------------- | ---------------------------------------------- | -------------------------------------------
|
|
|
|
| | $0.40          |                                         |                                                |                                            
| | $0.72 - $0.78  |                                         |                                                |                                            
| | $0.80 - $0.82  |                                         |                                                |                                            
| | $1.00          |                                         |                                                |                                            
| |                |                                         |                                                |                                            
| |                |                                         |                                                |                                            
| |                |                                         |                                                |                                            

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

| | EZchip
Technologies retained the service of BDO Ziv Haft Consulting Group (BDO),
as a third party appraiser, to calculate the fair market value of the ordinary shares and
other assumptions used in the BlackScholes-Merton option pricing model. The
weighted average price of EZchip Technologies ordinary share as calculated by BDO
for 2007 was $0.76. The weighted-average estimated fair value of employee stock options
granted in EZchip Technologies during the year ended December 31, 2007 as calculated by
BDO, was $0.47 per share using the BlackScholes-Merton option pricing model with
the following assumptions (annualized percentages):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 37

---

---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 16: |  | EZCHIP TECHNOLOGIES SHARES (CONT.)
|-------- | - | ----------------------------------

| | b. | EZchip
Technologies stock option plans (cont.):
| | -- | -----------------------------------------------

| | EZchip
Technologies used peer companies stock price data for calculating volatility in
accordance with SFAS 123(R), allowing exclusive reliance on historical volatility. The
Company has no reason to believe that its future volatility for the expected or
contractual term is likely to differ from the historical measures. The computation of
historical volatility uses a simple average calculation method, a sequential period of
historical data at least equal to the expected or contractual term of the employee stock
option, and a reasonably sufficient number of price observations are used. As a result of
the foregoing calculations, the weighted-average volatility used in the model for the
year ended December 31, 2007 is 75%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
risk-free interest is based on the yield from U.S. treasury bonds with an equivalent term
in effect on the time of grant. The weighted average interest rate used for the year
ended December 31, 2007 was 4.7%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
expected life of employee stock options represents the weighted-average period the stock
options are expected to remain outstanding. The expected life for options granted in
EZchip Technologies for the year ended December 31, 2007 is in the range from two to 4.7
years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | EZchip
Technologies is required to assume a dividend yield as an input in the BlackScholes-Merton
option pricing model. The dividend yield assumption is based on EZchip Technologies historical
and expectation of future dividend payouts. The dividend yield used for year ended
December 31, 2007 was 0%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
expected annual pre-vesting forfeiture rate affects the number of exercisable options.
Based on EZchip Technologies historical experience, the annual pre-vesting
forfeiture rate is 1.7%.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, there was $990 of total unrecognized stock-based compensation cost
related to non-vested stock-based compensation granted under the plans. That cost is
expected to be recognized over a weighted average period of 1.76 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 38

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|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 17: |  | TAXES ON INCOME
|-------- | - | ---------------

| | a. | FIN
48:
| | -- | -------

| | The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), on January 1, 2007. As a result
of the implementation of FIN 48, the Company recognized an increase of approximately $222
in the liability for unrecognized tax benefits, which was accounted for as an increase to
the January 1, 2007 balance of the accumulated deficit.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the Companys accounting policy, both before and after the adoption
of FIN 48, interest expense and potential penalties related to income taxes are included
in the tax expense of the Companys consolidated statements of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company had accrued interest liability related to uncertain tax
positions in the amounts of $25, which is included within income tax accrual on the
balance sheet.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiaries file federal and state income tax returns in the United
States and Israel. The Company and EZchip Technologies (the Israeli subsidiary) may be
subject to examination by the Israeli tax authorities for fiscal years 2005 through 2008.
EZchip Inc. (the U.S. subsidiary) may be subject to examination by the U.S. Internal
Revenue Service (IRS) from commencement year through 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company believes that it has adequately provided for any reasonably foreseeable outcome
related to tax audits and settlement. The final tax outcome of the Companys tax
audits could be different from what is reflected in the Companys income tax
provisions and accruals. Such differences could have a material effect on the Companys
income tax provision and net loss in the period in which such determination is made.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
reconciliation of the beginning and ending balances of the total amounts of gross tax
liabilities is as follows:
| | ------------------------------------------------------------------------------------------------------------------

| |                                         | December 31, 2008
| | --------------------------------------- | -----------------
|
|
|
|
| | Beginning balance                       |                  
| | Reduction for prior year tax positions  |                  
| | Additions for current year tax position |                  
| |                                         |                  
| | Ending balance                          |                  
| |                                         |                  

| | b. | Reduction
in Israeli tax rates:
| | -- | -------------------------------

| | For
tax year 2008, Israeli companies are subject to Corporate Tax on their
taxable income at the rate of 27%. Following an amendment to the Israeli Income Tax
Ordinance, 1961 (the Israeli Tax Ordinance), which came into effect on
January 1, 2006, the corporate tax rate is scheduled to decrease as follows: 26% for the
2009 tax year and 25% for the 2010 tax year and thereafter. Israeli companies are
generally subject to capital gains tax at a rate of 25% for capital gains (other than
gains deriving from the sale of listed securities) derived after January 1, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 39

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---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 17: |  | TAXES ON INCOME (CONT.)
|-------- | - | -----------------------

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

| | As
explained in Note 2b, the financial statements are measured in U.S. dollars. The
difference between the annual changes in the NIS/dollar exchange rate causes difference
between taxable income and the income before taxes shown in the financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred
income taxes on the difference between the functional currency and the tax bases of
assets and liabilities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959           (the
Law):
| | -- | ----------------------------------------------------------------------------------------------------

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

| | Under
the Approved Enterprise program, a company is eligible for governmental grants. The tax
benefits under such program are generally limited to 12 years from commencement of
operation or 14 years from the date of the approval, whichever is earlier. A company may
elect to receive an alternative package comprised of tax benefits, referred to as the
Alternative Track, rather than grants. Under the Alternative Track, a companys
undistributed income derived from an Approved Enterprise is exempt from corporate tax for
an initial period (two to ten years, depending on the geographic location of the Approved
Enterprise within Israel). The exemption begins in the first year that the company
realizes taxable income from the Approved Enterprise. There is no year limitation to the
Alternative Track. As of December 31, 2008, the Company had not generated any income
under the provisions of the Investment Law.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

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---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 17: |  | TAXES ON INCOME (CONT.)
|-------- | - | -----------------------

| | d. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959           (the
Law) (cont.):
| | -- | ------------------------------------------------------------------------------------------------------------

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

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

| | Currently
EZchip Technologies has two approved programs under the Investments Law, which entitles
the Company to tax benefits. The first program pursuant to the Investment Law, as in
effect prior to the amendment (an Approved Enterprise) and the second program pursuant to
the Investment Law, as in effect after the amendment (a Privileged Enterprise). Both
approved programs are subject to the alternative track provisions pursuant to which
undistributed income derived from the programs is exempt from tax for a ten year period.
The exemption period for the Companys approved programs starts in the first year in
which the Company generates taxable income from its approved enterprise, subject to
certain conditions. As mentioned above, the years limitation does not apply to the
exemption period for the approved enterprise.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
benefits available to an Approved and Privileged Enterprise are conditioned upon terms
stipulated in the Investment Law and the related regulations (which include making
specified investments in property and equipment, and financing a percentage of these
investments with share capital), and the criteria set forth in the applicable certificate
of approval. If EZchip Technologies does not fulfill these conditions in whole or in
part, the benefits can be cancelled and it may be required to refund the amount of the
benefits, linked to the Israeli consumer price index plus interest.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

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---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 17: |  | TAXES ON INCOME (CONT.)
|-------- | - | -----------------------

| | d. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959           (the
Law) (cont.):
| | -- | ------------------------------------------------------------------------------------------------------------

| | As
a result of the amendment to the Investment Law in April 2005, tax-exempt income
generated under the provisions of the amended law will subject us to taxes upon
distribution or liquidation and the Company may be required to record deferred tax
liability with respect to such tax-exempt income. As of December 31, 2008, the Company
had not generated any income under the provisions of the amended law.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Net
operating and capital losses carryforward:
| | -- | ----------------------------------------------

| | As
of December 31, 2008, the operating tax loss carryforwards of the Company and EZchip
Technologies amounted to $80,139. The loss may be carried forward indefinitely and may be
offset against future taxable income. The Company expects that during the period in which
such tax loss is utilized its income would be substantially tax-exempt.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
operating tax loss carryforwards through December 31, 2008 of EZchip Technologiessubsidiary
in the U.S amounted to $3,143. The loss may be offset against any future U.S. taxable
income of the U.S. subsidiary for periods of 20 years expiring gradually between
2021-2025.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Utilization
of the U.S. net operating losses may be subject to substantial annual limitation due to
the change in ownership provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of net
operating losses before utilization. As of December 31, 2008, the Company does not expect
that the change in ownership provisions will have an effect on its net operating losses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Companys and EZchip Technologies capital tax loss
carryforwards amounted to $28,523.
| | ------------------------------------------------------------------------------------------------------------------

| | f. | Net
Loss is comprised as follows:
| | -- | ---------------------------------

| |                   | Year ended December 31,
| | ----------------- | -----------------------
|
|
|
|
| | Domestic (Israel) |                        
| | Foreign           |                        
| |                   |                        
| |                   |                        
| |                   |                        

F - 42

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|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 17: |  | TAXES ON INCOME (CONT.)
|-------- | - | -----------------------

| | g. | Deferred
income taxes:
| | -- | ----------------------

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

| |                                                | December 31,
| | ---------------------------------------------- | ------------
|
|
|
|
| | Reserves and allowances                        |             
| |                                                |             
| | Operating loss carryforwards                   |             
| | Capital loss carryforwards                     |             
| | Deferred tax assets before valuation allowance |             
| | Less - valuation allowance                     |             
| |                                                |             
| | Net deferred tax assets                        |             
| |                                                |             

| | The
Company and its subsidiaries have a history of losses and therefore provided valuation
allowances in respect of deferred tax assets resulting from operating loss carryforwards,
capital loss carryforwards and other temporary differences.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Reconciliation
of the theoretical tax expense (benefit) to the actual tax           expense (benefit):
| | -- | ------------------------------------------------------------------------------------------------------

| | The
main reconciling items between the statutory tax rate of the Company and the effective
tax rate are the non-recognition of tax benefits from accumulated net operating loss
carryforwards among the Company and its subsidiaries due to the uncertainty of the
realization of such tax benefits and the effect of approved enterprise.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 43

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---

|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 18: |  | SEGMENTS AND GEOGRAPHIC INFORMATION
|-------- | - | -----------------------------------

| | a. | Segment
information:
| | -- | --------------------

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

| | b. | Total
revenues are attributed to geographic areas based on the bill-to location           of
the customers and/ or customers manufacturing subcontractors.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following presents total revenues for the years ended December 31, 2008, 2007 and 2006
and long-lived assets as of December 31, 2008, 2007 and 2006:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |                      | 2008 | 2007 | 2006
| | -------------------- | ---- | ---- | ----
|
|
|
|
| | Israel               |      |      | $   
| | China and Hong Kong  |      |      |     
| | Far East (excluding  |      |     
| | China and Hong Kong) |      |      |     
| | Canada               |      |      |     
| | USA                  |      |      |     
| | Europe & Others      |      |      |     
| |                      |      |      |     
| |                      |      |      | $   
| |                      |      |      |     

| | c. | Total
revenues from customers are distributed among the following product lines:
| | -- | --------------------------------------------------------------------------------

| |                                                | Year ended December 31,
| | ---------------------------------------------- | -----------------------
|
|
|
|
| | NP-1c processor chips                          |                        
| | (including network-processor based systems)    |                        
| | NP-2 and NP-3 processor chips                  |                        
| | (including network-processor based systems and |                        
| | NP3 royalties revenues)                        |                        
| | Software tools, services and others            |                        
| |                                                |                        
| |                                                |                        
| |                                                |                        

| | d. | Sales
to our significant customers, including sales to their manufacturing
          subcontractors, as a percentage of total revenue were as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |            | Year ended December 31,
| | ---------- | -----------------------
|
|
|
|
| | Customer A |                        
| | Customer B |                        
| | Customer C |                        
| | Customer D |                        

| | *
Represents less than 10% of the total revenue for the respective period end.
| | ------------------------------------------------------------------------------

F - 44

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|EZCHIP SEMICONDUCTOR LTD. (FORMERLY LANOPTICS LTD.) AND ITS SUBSIDIARIES
|------------------------------------------------------------------------
|                                                                        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|                                                                        
|U.S. dollars in thousands                                               

|NOTE 19: |  | MAJOR SUBCONTRACTORS
|-------- | - | --------------------

| | All
of the Companys network processor chips are manufactured by third party
subcontractors. While these subcontractors have been able to adequately meet the demands
of the Companys increasing business, the Company is and will likely continue to be
dependent upon such subcontractors to achieve acceptable manufacturing yields, quality
levels and costs, and to allocate to the Company sufficient capacity to meet the Companys
needs in a timely manner. Revenues could be materially and adversely affected should
these subcontractors fail to meet the Companys demand for products due to a
shortage of production capacity, process difficulties, low yield rates or financial
instability. For the year ended December 31, 2008, 2007 and 2006, the major
subcontractors accounted for approximately 73%, 71% and 80% respectively, of the Companys
cost of revenues.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 20: |  | FINANCIAL INCOME (EXPENSES), NET
|-------- | - | --------------------------------

| |                                                                 | Year ended December 31,
| | --------------------------------------------------------------- | -----------------------
|
|
|
|
| | Income:                                                         |                        
| | Interest income                                                 |                        
| | Foreign currency translation adjustments                        |                        
| | Change in fair value of warrants to Redeemable Preferred Shares |                        
| |                                                                 |                        
| |                                                                 |                        
| | Total income                                                    |                        
| |                                                                 |                        
| | Expenses:                                                       |                        
| | Interest and bank charges                                       |                        
| | Foreign currency translation adjustments                        |                        
| | Amortization of discount on long-term loan                      |                        
| | Interest on a long-term loan                                    |                        
| | Realized loss related to sale of marketable                     |                        
| | securities                                                      |                        
| | Accretion to redemption value of Redeemable                     |                        
| | Preferred Shares in EZchip Technologies, net (see               |                        
| | Note 2j)                                                        |                        
| |                                                                 |                        
| |                                                                 |                        
| | Total expenses                                                  |                        
| |                                                                 |                        
| | Financial income (expenses), net                                |                        
| |                                                                 |                        

F - 45

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---

# SIGNATURES

The
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on
its behalf.

| |  | EZCHIP SEMICONDUCTOR LTD.By: /s/ Eli Fruchter
Eli Fruchter Principal Executive Officer
| |  | ----------------------------------------------------------------------------------------------------

Dated: March 30, 2009

72

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