UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, 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, 2010
  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.
 (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
 Fax: +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 registeredOrdinary Shares, NIS 0.02 Par Value
NASDAQ Global Select 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:
 
 26,033,876 Ordinary Shares, par value NIS 0.02 per share (as of December 31, 2010)
 
 
 
 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 Yes £ 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

as issued by the International Accounting Standards Board o
Other 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. 333-163353 and 333-164332 and Form S-8 Registration Statements File Nos. 333-134593, 333-148932, 333-148933, 333-164330, 333-164331, 333-170900 and 333-170901.
 
 ii
 
 PART I

6ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
6ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
6ITEM 3.
KEY INFORMATION
6A.
SELECTED CONSOLIDATED FINANCIAL DATA
6B.
CAPITALIZATION AND INDEBTEDNESS
7C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
7D.
RISK FACTORS
7ITEM 4.
INFORMATION ON THE COMPANY
16A.
HISTORY AND DEVELOPMENT OF THE COMPANY
16B.
BUSINESS OVERVIEW
16C.
ORGANIZATIONAL STRUCTURE
25D.
PROPERTY, PLANTS AND EQUIPMENT
25ITEM 4A.
UNRESOLVED STAFF COMMENTS
25ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
25A.
OPERATING RESULTS
25B.
LIQUIDITY AND CAPITAL RESOURCES
33C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
34D.
TREND INFORMATION
35E.
OFF-BALANCE SHEET ARRANGEMENTS
35F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
35ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
35A.
DIRECTORS AND SENIOR MANAGEMENT
35B.
COMPENSATION OF DIRECTORS AND OFFICERS
37C.
BOARD PRACTICES
38D.
EMPLOYEES
44E.
SHARE OWNERSHIP
46ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
48A.
MAJOR SHAREHOLDERS
48B.
RELATED PARTY TRANSACTIONS
49C.
INTERESTS OF EXPERTS AND COUNSEL
50ITEM 8.
FINANCIAL INFORMATION
50A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
50B.
SIGNIFICANT CHANGES
51ITEM 9.
THE OFFER AND LISTING
51A.
OFFER AND LISTING DETAILS
51B.
PLAN OF DISTRIBUTION
52C.
MARKETS
52D.
SELLING SHAREHOLDERS
53E.
DILUTION
53F.
EXPENSE OF THE ISSUE
53ITEM 10.
ADDITIONAL INFORMATION
53A.
SHARE CAPITAL
53B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
53C.
MATERIAL CONTRACTS
55D.
EXCHANGE CONTROLS
56E.
TAXATION
56F.
DIVIDEND AND PAYING AGENTS
65G.
STATEMENT BY EXPERTS
65  iii
  H.
DOCUMENTS ON DISPLAY
65I.
SUBSIDIARY INFORMATION
66ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
66ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
67PART II

67ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
67ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
67ITEM 15.
CONTROLS AND PROCEDURES
67ITEM 16.
[RESERVED]
68ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
68ITEM 16B.
CODE OF ETHICS
68ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
69ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
69ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
69ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
69ITEM 16G.
CORPORATE GOVERNANCE
69PART III

70ITEM 17.
FINANCIAL STATEMENTS
70ITEM 18.
FINANCIAL STATEMENTS
70ITEM 19.
EXHIBITS
71SIGNATURES

73
 iv
  INTRODUCTION
 
 We were incorporated as a limited liability company under the laws of the State of Israel in 1989 and changed our name from LanOptics Ltd. to EZchip Semiconductor Ltd. on July 22, 2008.We are engaged in the development and marketing of Ethernet network processors for networking equipment. As used in this Annual Report, the terms “we,” “us,” “our” and “our company” mean EZchip Semiconductor Ltd. and our wholly-owned subsidiary EZchip Technologies Ltd., or EZchip Technologies, unless otherwise expressly stated.  Our ordinary shares are traded on the NASDAQ Global Select 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, 2010 as published by the Bank of Israel was NIS 3.549 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.”
  v
  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, 2008, 2009 and 2010, and the selected balance sheet data as at December 31, 2009 and 2010, 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, 2006 and 2007, and the selected balance sheet data as at December 31, 2006, 2007 and 2008, 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 31,2006


2007


2008


2009


2010(in thousands, except share and per share data)Consolidated Statement of Operations Data:Revenues

$
8,469


$
19,488


$
33,566


$
40,046


$
61,998Operating income (loss)


(10,285
)


(4,604
)


(6,045
)


4,897



20,749Net income (loss) attributable to EZchip Semiconductor shareholders


(12,317
)


(4,088
)


(4,600
)


17,382



13,643Per share data:Basic net income (loss) per share


(1.05
)


(0.25
)


(0.20
)


0.74



0.54Diluted net income (loss) per share


(1.05
)


(0.25
)


(0.20
)


0.66



0.52Weighted average number of ordinary shares used in computing basic net income (loss) per share


11,745,171



16,533,369



23,048,868



23,376,217



25,281,651Weighted average number of ordinary shares used in computing diluted net income (loss) per share


11,745,171



16,533,369



23,048,868



23,516,260



26,110,132Consolidated Balance Sheet Data:Working capital

$
19,427


$
46,016


$
52,554


$
75,033


$
111,583Total assets


66,293



105,245



164,103



197,423



222,861Long-term liabilities


5,801



3,272



4,081



4,779



5,974Preferred shares in EZchip Technologies


23,770



23,770



--



--



--Equity

$
32,613


$
74,425


$
154,914


$
180,463


$
209,029
 
 6
 
 B.
CAPITALIZATION AND INDEBTEDNESS
  Not applicable.
 
 C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
  Not applicable.
 
 D.
RISK FACTORS
  Investing in our ordinary shares involves a high degree of risk and uncertainty. You should carefully consider the risks and uncertainties described below before investing in our ordinary shares. Our business, prospects, financial condition and results of operations could be adversely affected due to any of the following risks.  In that case, the value of our ordinary shares could decline, and you could lose all or part of your investment.
  Risks Relating To Our Business
  We depend on a very limited number of key customers and one of our principal customers is expected to reduce its purchases from us over time.  If we are unable to maintain our relationship with these customers or if these customers significantly reduce the use of our NPUs in their systems, our future revenues and growth will be materially adversely affected.
  We currently depend on a very limited number of key customers.  Juniper Networks, a major tier-1 vendor of carrier Ethernet switches/routers, or CESRs, which is currently our largest customer, accounted for approximately 54% of our 2009 revenues and approximately 40% of our 2010 revenues.  Juniper Networks currently uses our NP-2 processors that we started to ship in 2006.  In October 2009, Juniper Networks announced its launch of a new family of processors and networking systems incorporating internally developed chips.  We expect that over time, as this new family of Juniper Networks products replaces the products that incorporate our NPUs, Juniper Networks will significantly reduce and eventually discontinue its purchases from us.
  Revenues from our other leading customer Cisco, which is the largest tier-1 vendor, are generated through Marvell Technology Group Ltd., or Marvell, pursuant to a royalty arrangement, as described in more detail in Item 4.B., "Information on the Company – Business Overview – Customers and Customer Support."  Cisco currently uses our NP-3 processors and is also expected to use our NP-4 processors in its future products.  Revenues from Marvell attributable to Cisco ramped up significantly during 2010 and accounted for 20% of our 2010 revenues, up from less than 10% of our 2009 revenues.  The growth of our revenues in 2011 and beyond will depend in large part on the revenues we generate from Marvell attributable to Cisco.  If Cisco 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.
  Our future growth will also be dependent in great measure upon the continued acceptance and utilization of our current and future products by our other customers (excluding Cisco and Juniper), that as a group accounted for 40% of our 2010 revenues.  If any of these vendors decide not to incorporate our products into their future products or to cease incorporating our network processors in their 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.
  Due to the lengthy design and development cycle, and other matters beyond our control, it is difficult to predict the time and manner in which Juniper Networks’ revenue will decline, and when Marvell through Cisco and our other customers will enter into more solid and predictable ramp up phases.
  7
 
 Unfavorable global economic conditions could have a material adverse effect on our business, operating results and financial condition.
  The crisis in the financial and credit markets in the United States, Europe and Asia in 2008 and 2009 led to a global economic slowdown, with the economies of the United States and Europe showing significant signs of weakness.  Carriers in such countries may continue to be under pressure or may not have recovered fully and as a result,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 remain uncertain or deteriorate further, our business, operating results and financial condition may be materially adversely affected.
  On March 11, 2011, an earthquake off the eastern coast of Japan triggered a devastating tsunami tidal wave, causing damage and destruction.  It is too early to predict the long-term impact of this disaster on the economy of Japan and elsewhere.
  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, such as Cisco, and creating relationships with other target customers with significant market share, if our target customers do not incorporate our products into theirs, or if the products of our target customers that incorporate our network processors are not commercially successful, our growth will be impeded.
  We 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, 2010 of approximately $176 million.  We incurred operating losses in 2006, 2007 and 2008.  Our limited operating history makes it difficult to evaluate the prospects of our business.  Moreover, the network processor industry is constantly evolving and is subject to technological and competitive forces beyond our control.  Our ability to design and market products to meet customer demand and the revenue and income potential of our products and business are unproven.  As an early stage company in the developing network processor industry, we face numerous risks and uncertainties.  Some of these risks relate to our ability to:
  ·
expand and enhance our product offerings;
  ·
increase our revenues;
  ·
diversify our sources of revenue;
  ·
respond to technological changes;
  ·
respond to competitive market conditions; and
  ·
respond to global economic conditions.
  8
 
 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.
  In 2007, we announced a new family of network processors targeting Ethernet Access applications.  Several models of the network processors, named NPA, were sampled in the fourth quarter of 2009 and first production shipments commenced in the fourth quarter of 2010.  The NPA product family addresses the transition of carrier access from ATM/TDM based networks to Ethernet packet-based networks and the provision 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.  Since we are a late comer to the access market, we face a greater level of competition from other merchant vendors, as compared to the competition we face in the high speed network processor market.
  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 decrease our net income.  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.
  9
 
 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 and the development of our network processors is a complex and uncertain process, 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.
  In addition, the development of our network processors is a complex and uncertain process and 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 and unexpected expenses or delays in the launch of these network processors, all which may adversely affect our results of operations.
  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 and third party manufacturers 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 and third party manufacturerscould 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, indemnify third parties, 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.
  10
 
 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.
  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-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, 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 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, which as of December 31, 2010 totaled $36.3 million.  These securities are subject to market fluctuations.  For example, in 2008 and into first half of 2009, the credit and capital markets deteriorated significantly and adversely impacted the fair value of our investments.  Future turmoil in the capital 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.
  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
  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 in the past and continues to fluctuate widely 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 few years 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.
  Future exercises of our options and vesting of our restricted share units may result in substantial dilution and future sales of these ordinary shares may cause the market price of our ordinary shares to decline.
  Future exercises of our options and vesting of our restricted share units may result in substantial dilution and future sales of these ordinary shares 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, or the perception that such sales could occur, could adversely affect the market price of our ordinary shares and may make it more difficult for investors to sell ordinary shares at a time and price which such investors deem appropriate.
  We have never paid cash dividends and have no intention to pay dividends in the foreseeable future.
  We have never paid cash dividends on our shares and do not anticipate paying any cash dividends in the foreseeable future.  We intend to retain earnings, if any, for use in our business, in particular to fund our research and development, which are important to capitalize on technological changes and develop new products and applications.  Any future dividend distributions are subject to the discretion of our board of directors and will depend on various factors, including our operating results, future earnings, capital requirements, financial condition, tax implications of dividend distributions on our income, future prospects and any other factors deemed relevant by our board of directors.  The distribution of dividends also may be limited by Israeli law, which permits the distribution of dividends only out of retained earnings or otherwise upon the permission of the court.  You should not rely on an investment in our company if you require dividend income from your investment.
  Our ordinary shares are traded on more than one market and this may result in price variations.
  Our ordinary shares are traded primarily on the NASDAQ Global Select 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 Select 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.
  12
 
 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 2010.  In recent years, 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.
  Recent popular uprisings in various countries in the Middle East and North Africa are affecting the political stability of those countries.  Such instability may lead to a deterioration in the political and trade relationships that exist between the State of Israel and these countries.  In addition, such instability may affect the global economy and marketplace as a result of changes in oil and gas prices.  Since our headquarters and research and development facilities are located in the State of Israel, any such events that affect the State of Israel may impact us in unpredictable ways.  If our operations are significantly impacted by such events, our results of operations may be adversely affected.
  Ongoing violence between Israel and the Palestinians as well as tension between Israel and neighboring countries or political instability in the regionmay have a material adverse effect on our business, financial conditions and results of operations.
  Additionally, some of our key employees in Israel are obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called for active military duty at any time in the event of a national emergency.  If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time.  Our operations could be disrupted by the absence for a significant period of one or more of our key employees due to military service.  Any disruption in our operations would harm our business.
  Fluctuations in the exchange rate between the U.S. dollar and foreign currencies may affect 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.  Since 2007, the NIS has generally 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 the depreciation 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.
  Currently we have three programs under the Israeli Law for the Encouragement of Capital Investments, 1959, commonly referred to as the Investment Law, which entitle us to certain tax benefits.  Our facilities in Israel have been granted Approved Enterprise status under the Investment Law and we have two Privileged Enterprises under the Investment Law.
  Prior to April 2005, the Investment Law provided that capital investments in a production facility (or other eligible assets) may be designated as an Approved Enterprise upon advance approval from the Investment Center of the Israel Ministry of Industry, Trade and Labor.  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. Therefore, our Approved Enterprise program is not subject to the provisions of the amendment, but our two Privileged Enterprise programs are.
  13
  In order to be eligible for tax benefits under the Investment Law, our Approved Enterprise and Privileged Enterprises must comply with various conditions set forth in the Investment Law and the criteria set forth in the applicable certificate of approval for the Approved Enterprise, 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.
  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.  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 only be transferred subject to the prior approval of an OCS committee and, under certain circumstances, also to the payment of a redemption fee which is a certain percentage of the price paid in connection with such a transfer.  A transfer, for the purpose of OCS rules, includes an actual sale of the technology, any exclusive license to develop, market, and manufacture products resulting from the technology or any other transaction which in essence constitutes a transfer of the technology and does not include the worldwide sale of products that are based on technology developed with OCS funding.  We may not receive the required approvals should we wish to transfer this technology in the future.  These restrictions may impair our ability to sell our technology assets, and the restrictions will continue to apply even after we have repaid the full amount of royalties payable for the grants.  In addition, the restrictions may impair our ability to consummate a merger or similar transaction in which the surviving entity is not an Israeli company.
  It may be difficult to enforce a U.S. judgment against us or our officers and directors, to assert U.S. securities laws claims in Israel or serve process on substantially all of our officers and directors.
  We are organized under the laws of the State of Israel.  Substantially all of our executive officers and directors and a substantial portion of our assets and the assets of these persons are located outside the United States.  Therefore, it may be difficult for an investor, or any other person or entity, to collect a judgment obtained in the United States against us or any of these persons, or to effect service of process upon these persons in the United States.  Furthermore, it may be difficult to assert U.S. securities law claims in original actions instituted in Israel.
  The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
  We are incorporated under Israeli law.  The rights and responsibilities of holders of our ordinary shares are governed by our articles of association and by Israeli law.  These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations.  In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at a general meeting of shareholders on certain matters.  Israeli law provides that these duties are applicable in shareholder votes on, among other things, amendments to a company's articles of association, increases in a company's authorized share capital, mergers and interested party transactions requiring shareholder approval.  In addition, a controlling shareholder, a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote, and a shareholder that possesses the power 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.
  14
 
 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 Select 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, compensation of executive officers and the requirement to obtain shareholder approval for certain dilutive events.
  As a foreign private issuer whose shares are listed on The NASDAQ Global Select Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of The NASDAQ Listing 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.  In addition, we follow our home country law, instead of the NASDAQ Listing 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 and arrangements, 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.  Under Israeli law and practice, in general, the approval of the board of directors is required for the establishment or amendment of equity based compensation plans and arrangements, unless the arrangement is for the benefit of a director, or a controlling shareholder, in which case audit committee and shareholder approval are also required.  Similarly, the approval of the board of directors is generally sufficient for a private placement unless the private placement involves a director, a controlling shareholder or is deemed a "significant private placement," in which case shareholder approval, and, in some cases, audit committee approval, would also be required.  The Israeli Companies Law defined a "significant private placement" as a private placement (i) resulting in a party becoming a controlling shareholder, or (ii) involving the issuance of a 20% or more voting rights in the company, which (A) results in a 5% or more shareholder increasing its interest in the company or an offeree becoming a 5% or more shareholder, and (B) involves consideration that is not solely cash or public traded securities, or is not on fair market terms.  As a foreign private issuer listed on The NASDAQ Global Select 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.  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.
  15
 
 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. and 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.
 
 We are currently engaged in the development and marketing of Ethernet network processors for networking equipment. We provide our customers with solutions that scale from 1-Gigabit to 100-Gigabits per second with a common architecture and software across all products.  Our 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.  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 and routers 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 applications and new protocols, simply by downloading new 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 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.
 
 16
 
 As carriers gradually migrate to Ethernet-based infrastructure, the various classes of equipment that make up the carrier networks are migrating to Ethernet-centric platforms, including Carrier Ethernet Switch Routers, or CESR, transport switches, and access platforms (in particular microwave backhaul switches, passive optical access optical line terminal, or PON OLT, and cable modem termination systems, or CMTS), IP DSL access multiplexers, or DSLAMS, and Ethernet Access switches.  Vendors of these types of systems 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.  Systems are typically built as a modular, multi-slot chassis that consists of several line cards with many network ports per line card or as a stand-alone, fixed configuration, flat frame known as a pizza box.
 
 Market Trends
  Networking 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.
 
 NPUs are the most suitable for use in networking equipment because of the high throughput and flexibility they provide. 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 20-Gigabit and higher throughput and used mostly in metro and edge equipment.
  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 relatively large volumes.  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.
 
 Carrier Ethernet equipment typically use a significant number of NPUs.  Systems are often built in a modular, multi-slot chassis.  Each chassis typically consists of 8-16 line cards, with each line card consisting of 1-8 NPUs, so that 8-128 NPUs might be used for a fully populated chassis.  Equipment built in a pizza box form will typically use 1-4 NPUs per box.
 
 Our Solution
  We design and produce network processors for high-speed networking equipment, integrating several key functions into a single chip.  In recent years we have also introduced products for the low-speed access market.  Networking equipment vendors use our 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.
 
 17
 
 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, media access controllers, or MACs, and a variety of specialized hardware blocks that accelerate various functions, 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.
 
 Our 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.  Our advantages over these earlier designs lie in the integration of processing, classification and traffic management functions in a single chip.  This is accomplished with patented and other proprietary elements, our 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 our products offer equipment vendors the performance they need and the ability to reduce chip count, power consumption and cost.
 
 We offer solutions that range in throughput from several Gigabit-per-second to 100 Gigabit-per-second with common architecture.  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.
 
 Products
  Network Processor Chips
 
 Our 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, which replaced the NP-1 processor.  Like the NP-1, the NP-1c is a single-chip, full-duplex, 10-Gigabit network processor that integrates search engines, yet it offered a significant increase in performance and cost reduction due to its improved process technology.  The NP-1c is essentially an improved and less expensive version of the NP-1 that uses a 0.13-micron chip manufacturing process.  In June 2008 we announced the end-of-life of the NP-1c and final shipments were made during 2010.
 
 The NP-2, introduced in July 2005, is, like its predecessor, the NP-1c, a single-chip, full-duplex, 10-Gigabit (20-Gigabit total) 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 competing NPUs, 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.
 
 While 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 network processor is manufactured by TSMC.
 
 The NP-3 is an enhanced version of NP-2, providing a significant increase in throughput.  We offer two versions of the NP-3 network processor.  The first is a special version developed jointly with Marvell for Cisco, and it sampled in 2007.  We developed the second version for the general market independently of Marvell, 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.
 
 18
 
 Pursuant to our agreement with Marvell, Marvell is responsible for the manufacturing and sells the customized version of the NP-3 to Cisco 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 Cisco.  Since we do not incur any production costs under this model, sales to this customer result in a higher gross margin to our company.  The standard NP-3 network processor is manufactured by IBM and is sold by us in a direct selling model to our other customers.
 
 The NP-4, a 100-Gigabit NPU (total throughput), continues with our distinctive high level integration of functionality into the network processor.  NP-4 offers higher throughput than NP-3 and targets 40-Gigabit, 100-Gigabit and up to 400-Gigabit line-card and pizza box carrier Ethernet applications.  In addition to its integrated classifiers and traffic managers, the NP-4 includes Ethernet physical layer transceivers, or PHYs, and for some applications may eliminate the need for a separate fabric interface chip.  Integration of these functions, normally performed by separate chips, is intended to further save our customers valuable space on their cards while reducing system costs and complexity.  We began sampling the NP-4 in January 2010.  We expect the NP-4 to enter into production during the second half of 2011.
 
 We have entered into an agreement with Marvell pursuant to which Marvell will be the sole vendor for our NP-4 network processor.  The NP-4 network processor will be manufactured by TSMC (see below in this Item 4.B “Information on the Company – Business Overview – Manufacturing”).  Pursuant to our NP-4 agreement with Marvell, the NP-4 may be sold in two methodologies, (i) directs sales to the general market in which we will purchase the NP-4 from Marvell and sell it to our customers, and (ii) a royalty model, similar to the one implemented with NP-3, with respect to sales to Cisco.
 
 In 2010, we begun work on the NP-5, a 200-Gigabit NPU (total throughput), that will provide a solid roadmap for our customers that use our NP-2, NP-3 and NP-4 processors. The NP-5 continues our strategy of increasing NPU integration, performance and functionality, to allow networking systems to deliver higher total throughput and greater port density at reduced cost points.
 
 The NPA is a new series of network processors targeting Ethernet Access applications.  Several models of the network processors are offered with combinations of 100-Megabit, 1-Gigabit and 10-Gigabit Ethernet ports.  This family of access NPUs applies the technology we developed for our high-speed NPUs to allow building Ethernet access switching systems.  In 2009, we sampled the first three members of the NPA product family: NPA-1, NPA-2 and NPA-3 that provide an aggregate throughput of 10-Gigabit.
 
 In the latter part of 2010, the NPA-1, NPA-2 and NPA-3 went into production.  We are currently completing work on a lower speed device, the NPA-0, which will complement our access NPU offerings to also address applications that require low throughput at low price points.  We expect to sample the NPA-0 during 2011.  In addition to functions available on NPA-1, the NPA-0 also integrates a CPU that can be used as the system host CPU.  As such, the NPA-0 may serve as a complete system-on-a-chip and provide a cost and power effective solution for small access applications, such as mobile base-station traffic backhauling and branch office routing nodes.
 
 With the addition of the NPA family of access NPUs, we now offer customers a broad range of NPUs ranging in throughput from several Gigabits to 100 Gigabits, and once the NP-5 becomes available, to 200 Gigabits, with similar architecture and software that can be ported to multiple product lines.
  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 vary in their form factor:
  19
  ·
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.
  ·
Evaluation systems for our NP-4 and NPA network processors in various form factors.
  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 our 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, we also provide customers with a broad library featuring data plane 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), GPON/EPON OLT functionality, Network Address Translation and Server Load Balancing.  New code is periodically added to this library.
 
 Future Products
  In order to maintain our technology leadership position and broaden the solutions we offer, we are currently developing next generation devices for both our NP high-speed NPUs and our low-speed NPA access NPUs.
 
 In addition, during 2010 we opened a new design center in Kiryat Gat, a city located in the southern part of Israel, at which we are currently developing a new product line, targeting a different market segment which we believe will significantly increase our total addressable market.  We are at a very early stage of development of the new product line and it will take several years for the new product line to generate revenues.
 
 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 type of TOP employs a unique architecture with a customized, function-specific data path and instruction set.  This minimizes the number of clock cycles required for complex packet manipulation and provides exceptionally fast packet processing.  TOP performance is boosted by a super-scalar architecture in which multiple instances of the TOPs operate in parallel within each pipeline stage.
 
 20
 
 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.
 
 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, 118 employees, representing approximately 75% of our employees, are engaged in research and development.  Our 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.  Our research and development expenses, net were approximately $13.0 million in 2008, $13.2 million in 2009 and $13.7 million in 2010.  We received research and development grants of approximately $3.0 million in 2008, $3.0 million in 2009 and $3.2 million in 2010.
 
 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 our products can be exploited.  We target designers, manufacturers and vendors of networking equipment and other large-scale packet processing network systems.
 
 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 21 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.
 
 21
 
 Our marketing communications 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 (including through the recently acquired Dune Networks), Broadlight, Cortina, Marvell, NetLogic, PMC-Sierra, Vitesse and Zarlink.
 
 Customers and Customer Support
  Most of our customers are vendors of networking equipment to which we sell directly or through contract manufacturers or distributors.
 
 Our processors target the Carrier Ethernet equipment market, which consists of five major segments.  Fourteen vendors have significant market share within these five Carrier Ethernet market segments, although not all vendors are active in all segments.  There are many additional vendors actively providing equipment into the various segments, presently with relatively small market shares.  Each vendor that is active in one or more Carrier Ethernet segment represents one or more potential platforms that may use our processors.  Out of the 14 main vendors, currently 11 are EZchip’s customers.  We continue to work towards expanding into additional product lines and market segments with our existing customers, as well as winning new customers.
 
 Within the five segments of the Carrier Ethernet market, CESR is currently our main market and where we derive most of our revenues.  There are seven main players in the CESR segment, of which six are currently customers for our NPUs.  Two major tier-1 CESR vendors are currently our principal customers, and these vendors are building several of their CESR platforms based on our network processors:
 
 ·
Juniper Networks, which accounted for approximately 40% of our 2010 revenues, entered production with NP-2 based products in 2007 and continued to launch additional products that incorporate our NPUs during 2008 and 2009.  In October 2009, Juniper Networks announced its launch of a new family of processors and networking systems incorporating internally developed chips.  We expect that over time, as this new family of Juniper Networks products replaces the products that incorporate our NPUs, Juniper Networks will significantly reduce and ultimately discontinue its purchases from us.  We believe we will begin generating significant revenues from Cisco, as described below, and additional tier-1 customers before Juniper Networks significantly reduces or discontinues its purchases from us in the future, following its announcement in October 2009.  However, due to the lengthy design and development cycle, and other matters beyond our control, it is difficult to predict the time and manner in which Juniper Networks’ revenue will decline, and when Marvell through Cisco and our other customers will enter into more solid and predictable ramp up phases.
  ·
Cisco has selected a customized version of the NP-3 and NP-4, based on our agreements with Marvell, for its principal CESR platforms.  Pursuant to our agreement with Marvell, Marvell is responsible for the manufacturing and selling of the customized version of the NP-3 and NP-4 to Cisco 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 Cisco.  Since we do not incur any production costs under this model, sales to Cisco result in a higher gross margin to our company.  Cisco entered production with the NP-3 during the first quarter of 2009 and accounted for approximately 20% of our 2010 revenues.  We expect Cisco, through Marvell, to become our largest customer and the main driver of our revenue growth in the coming years.
  22
 
 Customer support is provided from our Israeli headquarters and our offices in the United States and by local support in China.  Our 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 two vendors in addition to us  that provide high-speed network processors that target the metro and access switches, and edge routers: Sandburst Corporation (part of Broadcom Corporation) and Xelerated, Inc.  In addition, Broadcom Corporation (including through Dune Networks that was recently acquired by Broadcom) and Marvell have released switch ASICs (non-programmable chips) that target these market segments as well.  Agere Systems Inc. (which was acquired by LSI) and Wintegra Inc. (which was acquired by PMC-Sierra in 2010) 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 who choose to develop their own network processors or in-house ASIC solutions, especially in the CESR segment.  Some of our competitors or potential competitors are larger, have significantly greater sales, have greater financial resources and are better known.
 
 We believe that the principal elements of competition in the market for advanced network processors are integration, flexibility and price.  Integration reduces the chip count (the number of chips needed in a given application to achieve the system manufacturer’s design goals), board space, power usage (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 we are 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 20-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 Ethernet equipment, 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 equipment 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.
 
 23
 
 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.
 
 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.
 
 TSMC manufactures our NP-2 line of products using the 0.13 micron process, the special version of our NP-3 NPU, which we developed with Marvell, and the NPA-1, NPA-2 and NPA-3 products, using the 90 nanometer process.  IBM manufactures our NP-3 line of products using the 90 nanometer process.TSMC also manufactures the NP-4 using the 55 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 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.
 
 24
 
 We have been awarded ISO 9001:2000 certification.
 
 C.
ORGANIZATIONAL STRUCTURE
  We are organized under the laws of the State of Israel.  We have two wholly owned subsidiaries: EZchip Technologies Ltd., a corporation organized under the laws of the State of Israel, and its wholly-owned subsidiary EZchip Inc., a corporation incorporated under the laws of the State of Delaware.
 
 D.
PROPERTY, PLANTS AND EQUIPMENT
  We do not own any real property.  Our principal development, marketing and administrative facilities occupy approximately 33,500 square feet of a building in Yokneam, Israel, at an aggregate rental cost of approximately $440,000 in 2010.  The lease for our principal offices expires in January 2014.
 
 In October 2010, we leased a development facility in Kiryat Gat, Israel.  We occupy approximately 4,900 square feet, at an aggregate annual rental cost of approximately $60,000.  The lease expires in October 2015, and we have an option to extend the lease for an additional five years.
 
 We conduct our sales operations through two locations in the United States.  We lease office space in California and Massachusetts under one-year renewable leases.  The aggregate rental cost for the two offices was approximately $85,000 in 2010.
 
 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 $110,000 in 2008, $319,000 in 2009 and $224,000 in 2010.  Our capital expenditures in 2008, 2009 and 2010 were spent primarily for the procurement of research and development hardware equipment and software tools.
 
 ITEM 4A
UNRESOLVED STAFF COMMENTS
 Not applicable.
 
 ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  A.
OPERATING RESULTS
  The following discussion of our results of operations should be read together with our consolidated financial statements and the related notes, which appear elsewhere in this Annual Report.  The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties.  Our actual results may differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute to such differences include those discussed below and elsewhere in this Annual Report.
 
 General
  We are 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.
 
 25
 
 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.
 
 Revenues from network processor chips and network processor-based systems are recognized upon shipment in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC605 “Revenue Recognition,” when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collectability 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.
 
 Revenues from sales of software tools and maintenance services, which are sold separately from other products, are recognized in accordance with FASB ASC 985-605 “Software.”  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 FASB ASC 605-25 “Revenue Recognition,” relating to the separation of multiple deliverables into individual accounting units with determinable fair values.  Revenues from such software tools and maintenance were immaterial during 2008, 2009 and 2010.
 
 In 2006 and 2010, we signed agreements with Marvell.  According to the agreements, Marvell manufactures and sells the customized version of our NP-3 and NP-4 network processors to Cisco and pays us royalties for each chip it sells to Cisco.  Royalty revenue is recorded in accordance with ASC 605-45-45, “Considerations of Reporting Revenue Gross as a Principal versus Net as an Agent,” on a net basis.  In accordance with the agreements with Marvell, Marvell sends us royalty reports, once a month, which reflect the prior month’s sales.  Accordingly, we recognize royalty revenues 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 FASB ASC 350 "Intangibles-Goodwill and other,” under which 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, which segment comprises our only reporting unit.  ASC 350 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, 2010, no instances of impairment were found.
 
 26
 
 Equity-based Compensation Expense
  We account for equity-based compensation in accordance with FASB ASC 718 “Compensation-Stock Compensation,” 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.  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 measure the fair value of our options using the Black-Scholes-Merton option pricing model.  The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term.  Expected volatility was calculated based upon actual historical stock price movements.  The expected term of options granted was calculated using the simplified method (being the average between the vesting periods and the contractual life of the options in accordance with SAB 107, as replaced and amended, effective January 1, 2008, by SAB 110).  The risk-free interest rate is based on the U.S. Treasury yield curve of bonds with an equivalent term to the expected life of the options.  We have historically not paid dividends and currently have no intention to pay dividends in the foreseeable future.
 
 Accounting for Income Tax
  We account for income taxes in accordance with FASB ASC 740, “Income Taxes.”  ASC 740 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 record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized.  In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance.  Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in the past.  As a result of our cumulative losses in prior years and the utilization of our loss carryforward opportunities, we have recorded valuation allowances to reduce our net deferred tax assets to the amount we believe is more likely than not to be realized.  While we have considered future taxable income and ongoing tax planning strategies in assessing the need for any valuation allowance, in the event we were to determine that we will be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would increase income in the period such a determination is made.  Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would be charged to expenses in the period such a determination is made.
 
 On January 1, 2007, we adopted an amendment to FASB ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions.  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 FASB ASC 320 “Investments - 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, 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, net.
 
 27
  We recognize an impairment charge when a decline in the fair value of our marketable securities below the cost basis is judged to be other-than-temporary.  When evaluating the investments for other-than-temporary impairment, we review factors such as the length of time and extent to which the fair value has been below cost basis, the financial condition of the issuer and any changes to the issuer, and our intent to sell, or whether it is more likely than not we will be required to sell the investment before recovery of the investment’s amortized cost basis.
 Valuation of Financial Instruments
  We account for certain assets and liabilities at fair value under ASC 820, “Fair Value Measurements and Disclosures”.  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, ASC 820 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;
 
 ·
Level 2 - Includes other inputs that are directly or indirectly observable in the marketplace, other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets with insufficient volume or infrequent transactions, or other inputs that are observable (model-derived valuations in which significant inputs are observable), or can be derived principally from or corroborated by observable market data; and
 
 ·
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.  We categorized each of our fair value measurements in one of these three levels of hierarchy.
 
 Results of Operations
  The following table presents, for the periods indicated, information concerning our results of operations.
 
 Year Ended December 31,2008


2009


2010(in thousands, except per share data)Revenues

$
33,566


$
40,046


$
61,998Costs of revenues


11,983



11,224



15,668Amortization of existing technology


2,083



1,985



1,915Gross profit


19,500



26,837



44,415Operating expenses:Research and development, net


12,953



13,243



13,665In-process research and development charge


5,125



--



--Sales, general and administrative


7,467



8,697



10,001Total operating expenses


25,545



21,940



23,666Operating income (loss)


(6,045
)


4,897



20,749Financial income, net


1,408



902



1,130Income (loss) before income taxes


(4,637
)


5,799



21,879Taxes benefit (taxes on income)


--



11,675



(8,236
)Net income (loss)


(4,637
)


17,474



13,643Less: Net (income) loss attributable to noncontrolling interest


37



(92
)


--Net income (loss) attributable to EZchip Semiconductor shareholders

$
(4,600
)

$
17,382


$
13,643Basic net income (loss) per share attributable to EZchip Semiconductor shareholders

$
(0.20
)

$
0.74


$
0.54Diluted net income (loss) per share attributable to EZchip Semiconductor shareholders

$
(0.20
)

$
0.66


$
0.52
 
 28
  Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
  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, 2010, revenues increased by $22.0 million, or 55%, to $62.0 million from $40.0 million for the year ended December 31, 2009, primarily as a result of increased sales to Juniper Networks and Cisco (through Marvell).  Juniper Networks, currently our largest customer, accounted for $25.0 million (40% of revenues) in 2010, compared to $21.6 million (54% of revenues) in 2009.  Cisco through Marvell accounted for $12.5 million (20% of revenues) in 2010, compared to $3.1 million (8% of revenues) in 2009.  Marvell manufactures and sells a customized version of our NP-3 processor to Cisco and pays us royalties for each chip it sells to Cisco.  We recognize revenues on account of such sales on a net basis.  ZTE Corporation accounted for $6.0 million (10% of revenues) in 2010, compared to $1.5 million (4% of revenues) in 2009.  Our other customers as a group accounted for $18.5 million (30% of revenues) in 2010, compared to $13.8 million (34% of revenues) in 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, 2010, our cost of revenues increased by $4.5 million, or 40%, to $15.7 million (25% of revenues) from $11.2 million (28% of revenues) for the year ended December 31, 2009.  The increase in cost of revenues is mainly attributable to the growth in revenues.  The decrease in cost of revenues as a percentage of revenues is mainly attributable to higher portion of royalty revenues from Marvell, which bear no cost of goods sold (other than royalties due to the OCS in connection with grants received from the OCS in the current and prior years).
 
 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., “- Liquidity and Capital Resources” and in Notes 3 and 10 to our consolidated financial statements).  Each of the EZchip Technologies’ share acquisitions (other than the 2009 employee exchange offer) was accounted for according to the purchase method of accounting 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 being amortized using the straight-line method over its useful life, which is up to four years.  For the year ended December 31, 2010, amortization of existing technology decreased by $0.1 million, or 5%, to $1.9 million from $2.0 million for the year ended December 31, 2009.
 
 Gross Profit
  For the year ended December 31, 2010, gross profit increased by $17.6 million, or 66%, to $44.4 million (72% of revenues) from $26.8 million (67% of revenues) for the year ended December 31, 2009, primarily as a result of the increase in revenues.  The increase in gross profit as a percentage of revenues is mainly the result of higher portion of royalty revenues from Marvell, which bear no cost of goods sold (other than royalties due to the OCS in connection with grants received from the OCS in the current and prior years), as well as from relatively flat year-over-year labor costs, amortization of intangible assets and stock based compensation.
 
 29
 
 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).  Since April 1, 2006, we have received research and development participation grants from the OCS.  For the year ended December 31, 2010, research and development costs increased by $0.6 million, or 4%, to $16.9 million (excluding OCS grants of $3.2 million) from $16.3 million (excluding OCS grants of $3.0 million) for the year ended December 31, 2009.  The increase in research and development expenses is mainly attributable to higher labor costs resulting primarily from an increase in the number of research and development employees.  We expect research and development expenses to increase significantly in 2011, mainly as a result of the new product line development that is being conducted at our new design center in Kiryat Gat, targeting a different market segment.
 
 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, 2010, such expenses increased by $1.3 million, or 15%, to $10.0 million from $8.7 million for the year ended December 31, 2009.  The increase is primarily attributable to a higher level of labor costs, sales commissions to third party representatives and a higher level of share-based compensation expenses under ASC 718.
 
 Financial Income, Net
  Financial income, 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, 2010, net financial income increased by $0.2 million to $1.1 million from net financial income of $0.9 million for the year ended December 31, 2009.  This increase is attributable mainly to higher levels of cash, cash equivalents short-term deposits and marketable securities in the 2010 period.
 
 Taxes benefit (taxes on income)
  For the year ended December 31, 2010, we recorded taxes on income of $8.2 million, as compared to a tax benefit of approximately $11.7 million for the year ended December 31, 2009.  The tax benefit in 2009 was derived from an increase in deferred tax assets, reversing valuation allowances on deferred tax assets.  The $8.2 million tax expense in 2010 resulted from utilization of the deferred tax asset.  We expect to utilize the remainder of the deferred tax asset during 2011, after which we expect to start utilizing certain tax benefits available to our Approved and Privileged Enterprise programs.
 
 Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
  Revenues
  For the year ended December 31, 2009, revenues increased by $6.4 million, or 19%, to $40.0 million from $33.6 million for the year ended December 31, 2008.  Juniper Networks, currently our largest customer, accounted for $21.6 million (54% of revenues) in 2009, compared to $18.4 million (55% of revenues) in 2008.  Juniper Networks entered production with NP-2 based products in 2007 and continued to launch additional products that incorporate our NP-2 processors during 2008 and 2009.  Cisco through Marvell accounted for $3.1 million (8% of revenues) in 2009, compared to $0.7 million (2% of revenues) in 2008.  We recognize revenues on account of such sales on a net basis.  Our other customers as a group accounted for $15.3 million (38% of revenues) in 2009, compared to $14.5 million (43% of revenues) in 2008.  Excluding the NP-1c processor, which reached its end-of-life in early 2009 and is no longer offered by us, other customers as a group increased by $3.3 million, or 33%, to $13.3 million for the year ended December 31, 2009 from $10.0 million for the year ended December 31, 2008.
 
 30
 
 Cost of Revenues
  For the year ended December 31, 2009, our cost of revenues decreased by $0.8 million, or 6%, to $11.2 million (28% of revenues) from $12.0 million (36% of revenues) for the year ended December 31, 2008.  The decrease in cost of revenues is mainly attributable to lower unit costs resulting from increased manufacturing volume, as well as favorable product and customer mix.  The decrease in cost of revenues as a percentage of revenues is attributable to the foregoing, as well as increased royalty revenues from Marvell, which bear no cost of goods sold (other than royalties due to the OCS in connection with grants received from the OCS in the current and prior years).
 
 Amortization of Existing Technology
  For the year ended December 31, 2009, amortization of existing technology decreased by $0.1 million, or 5%, to $2.0 million from $2.1 million for the year ended December 31, 2008.
 
 Gross Profit
  For the year ended December 31, 2009, gross profit increased by $7.3 million, or 38%, to $26.8 million (67% of revenues) from $19.5 million (58% of revenues) for the year ended December 31, 2008, primarily as a result of the increase in revenues.  The increase in gross profit as a percentage of revenues is mainly the result of lower unit costs resulting from increased manufacturing volume, favorable product and customer mix and a higher portion of royalty revenues from Marvell, which bear no cost of goods sold (other than royalties due to the OCS in connection with grants received from the OCS in the current and prior years).
 
 Research and Development Expenses, Net
  For the year ended December 31, 2009, research and development costs remained substantially constant at $16.3 million (excluding OCS grants of $3.0 million) compared to $16.0 million (excluding OCS grants of $3.0 million) for the year ended December 31, 2008.
 
 In-Process Research and Development Charge
  We recorded in-process research and development charges of $5.1 million in the year ended December 31, 2008 in connection with our purchases of EZchip Technologies’ shares in January 2008.  See Note 3 to the consolidated financial statements.  We did not record any in-process research and development charges in the year ended December 31, 2009 as the 2009 employee exchange offer was accounted for in accordance with ASC 810.
 
 Sales, General and Administrative Expenses
  For the year ended December 31, 2009, sale, general and administrative expenses increased by $1.2 million, or 16%, to $8.7 million from $7.5 million for the year ended December 31, 2008.  This increase is primarily attributable to a higher level of share-based compensation expenses under ASC 718 and amortization of intangible assets acquired in connection with our purchase of shares of EZchip Technologies in prior years.
 
 Financial Income, Net
  For the year ended December 31, 2009, net financial income decreased by $0.5 million to $0.9 million from net financial income of $1.4 million for the year ended December 31, 2008.  This decrease is attributable mainly to lower prevailing interest rates in the 2009 period.
 
 31
 
 Taxes benefit (taxes on income)
  For the year ended December 31, 2009, we recorded an income tax benefit of approximately $11.7 million.  The benefit was derived from an increase in deferred income tax assets, reversing valuation allowances on deferred income tax assets.  We did not record an income tax benefit or taxes on income for the year ended December 31, 2008.
  Effective Corporate Tax Rate
  Israeli companies were subject to corporate tax at the rate of 25% of their taxable income in 2010.  The corporate tax rate was further reduced to 24% in 2011.  In July 2009, the Knesset passed the Law for Economic Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and 2010), 2009, which prescribes, among other things, a gradual reduction in the rates of the Israeli corporate tax and real capital gains tax starting in 2011 to the following tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%.  However, because we have elected to participate in the alternative package of tax benefits for our current Approved and Privileged Enterprises, the income derived from these enterprises 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 our Approved and Privileged Enterprises is valid for ten years following the first year in which the company generated net taxable income associated with each enterprise.  Certain investment income derived by us from investments may not be regarded by the Israeli tax authorities as income from our Approved Enterprise or Privileged Enterprises and consequently, may be taxed at the regular statutory rate in Israel.  As of December 31, 2010, we did not generate any tax-exempt income from our Approved Enterprise and Privileged Enterprises.  See Item 10.E, “Taxation – Israeli Taxation – Law for the Encouragement of Capital Investments, 1959” for more information about these programs.
 
 We, EZchip Technologies and EZchip Inc. had aggregate operating tax loss carryforwards of approximately $46.4 million as of December 31, 2010 ($31.2 million of which relate to EZchip Semiconductor, $11.2 million of which relate to EZchip Technologies and $4.0 million of which related to EZchip Inc.).
 
 EZchip Inc. is subject to U.S. income taxes.  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.
 
 We and EZchip Technologies have accumulated capital loss carryforwards in the amount of $30.6 million.
 
 To prepare our consolidated financial statements, we estimate our income taxes in each of the jurisdictions in which we operate.  This process involves estimating our actual tax exposure together with assessing temporary differences resulting from the differing treatment of certain items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.
 
 We must also make judgments regarding the realizability of deferred tax assets. The carrying value of our net deferred tax asset is based on our belief that it is more likely than not that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets.  We have established a valuation allowance for deferred tax assets which we do not believe meet the “more likely than not” criteria.  Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors.  If our assumptions and consequently our estimates change in the future, the valuation allowances we have established may be increased or decreased, resulting in a respective increase or decrease in income tax expense.  Our effective tax rate is highly dependent upon the geographic distribution of our U.S. and Israeli earnings or losses, the tax regulations and tax holidays in the United States and Israel, the availability of tax credits and carryforwards.
 
 Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.  Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met.  Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.  We recognize potential accrued interest and penalties related to unrecognized tax benefits within our consolidated statements of income as income tax expense.
 
 32
 
 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.  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.  See Note 18 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 2y 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, our research and development was funded through the proceeds of third party investments, combined with contributions from our company.  Since April 2006, our research and development efforts have been financed, in part, through grants from the OCS.
 
 Working Capital; Cash, Cash Equivalents; Short-Term Deposits and Marketable Securities. As of December 31, 2010, we had $111.6 million in working capital and $101.3 million in cash, cash equivalents, short-term deposits and marketable securities, compared to $75.0 million in working capital and $67.2 million in cash, cash equivalent and marketable securities as of December 31, 2009 and $52.6 million in working capital and $48.1 million in cash, cash equivalents, short-term deposits and marketable securities as of December 31, 2008.
 
 Cash flows.  The following table summarizes our cash flows for the periods presented:
 
 Year ended December 31,2008


2009


2010(in thousands)Statement of Cash Flows Data:Net cash provided by operating activities

$
6,242


$
17,083


$
26,028Net cash used in investing activities


(16,834
)


(4,741
)


(37,851
)Net cash provided by financing activities


8



1,518



9,060Increase (decrease) in cash and cash equivalents


(10,584
)


13,860



(2,763
)Cash and cash equivalents — beginning of year


31,472



20,888



34,748Cash and cash equivalents — end of year

$
20,888


$
34,748


$
31,985
 
 Net cash provided by operating activities was approximately $26.0 million for the year ended December 31, 2010 compared with net cash provided by operating activities of approximately $17.1 million for the year ended December 31, 2009 and net cash used in operating activities of approximately $6.2 million for the year ended December 31, 2008.  The improvement in cash flows from operating activities in 2010 and 2009 resulted from the increase in revenues during 2010 (55% over 2009) and 2009 (19% over 2008), while gross margins improved (as explained above) in 2010 and 2009.  There was no material change in the mix or type of expenses used in operating activities during 2008 through 2010.
 
 33
 
 Net cash used in investing activities was approximately $37.9 million for the year ended December 31, 2010.  Of such amount, approximately $37.3 million, net, was used to purchase marketable securities and for investment in short term deposits, approximately $0.4 million was used to purchase property and equipment and $0.2 million was used to invest in an affiliated company (see Note 2j to our consolidated financial statements).  Net cash used in investing activities was approximately $4.7 million for the year ended December 31, 2009.  Of such amount, approximately $4.6 million, net, was used to purchase marketable securities and for investment in short term deposits and approximately $0.1 million was used to purchase property and equipment.  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.
 
 For the year ended December 31, 2010, net cash provided by financing activities was $9.1 million, of which approximately $8.0 million was attributable to proceeds from the exercise of employee stock options and approximately $1.1 million, net from the issuance of shares in an underwritten public offering.  For the year ended December 31, 2009, net cash provided by financing activities was approximately $1.5 million, attributable to proceeds from the exercise of employee stock options.  For the year ended December 31, 2008, net cash provided by financing activities was approximately $8,000.
 
 We believe that our available cash, cash equivalents short term deposits and marketable securities balances will provide sufficient cash resources to finance our operations at least through the next 12 months.
 
 Public Offerings.In December 2009, we concluded a public offering of our ordinary shares, as described below under Item 7.B. “Major Shareholders and Related Party Transactions – Related Party Transactions.”  We used all the net proceeds from the December 2009 public offering to purchase a portion of the securities of EZchip Technologies tendered in the Employee Exchange Offer, as described below under Item 7.B. “Major Shareholders and Related Party Transactions – Related Party Transactions.”
 
 In January 2010, we issued and sold 106,893 ordinary shares for a total amount of $1.1 million following the exercise by the underwriter of its over-allotment option granted in the 2009 underwritten public offering.
 
 C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
  Currently, 118 employees, representing approximately 75% 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 31,2008


2009


2010(in thousands)Research and development expenses

$
15,964


$
16,292


$
16,863Less Office of the Chief Scientist grants


3,011



3,049



3,198Research and development expenses, net

$
12,953


$
13,243


$
13,665
 
 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.
 
 34
 
 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.
 
 D.
TREND INFORMATION
  See Item 4.B “Information on the Company – Business Overview” and the discussion in Item 5.A “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.
 
 F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
  The following table summarizes our material contractual obligations as of December 31, 2010:
 
 Payments due by periodContractual Obligations

Total


Less than

1 year


1–3 years


4-5 years


More than

5 years(in thousands)Operating lease obligations

$
504


$
369


$
135


$
--


$
--Uncertain income tax position (1)


296



--



--



--



--Severance pay (2)


5,974



--



--



--



--Total

$
6,774


$
369


$
135


$
--


$
--
 _________
  (1)
Uncertain income tax position under FASB ASC 740, “Income Taxes,” is due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement.  See Note 15a to our consolidated financial statements for further information regarding our liability under ASC 740.
 
 (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, $0.8 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(1)

61

Chairman of the BoardEli Fruchter(1)(2)

55

Director, President and Chief Executive Officer of EZchip TechnologiesDror Israel

42

Chief Financial OfficerAmir Eyal

51

Vice President – Business Development of EZchip TechnologiesRan Giladi (1)(3)

56

DirectorKaren Sarid (3)(4)

60

DirectorShai Saul (1)(3)(4)(5)

49

DirectorDavid Schlachet (2)(3)(4)(5)

65

Director
  35
 
 ___________________
  (1)
Member of our Strategy Committee.
  (2)
Member of our Risk Management Committee.
  (3)
“Independent Director” under rules of the Securities and Exchange Commission, NASDAQ Listing Rules and the Israeli Companies Law (see explanation below)
  (4)
Member of our Audit Committee.
  (5)
“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 Ltd. 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.
 
 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 Giladihas 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 1996 until 2000 and he resumed such position in 2010.  Prof. Giladi was the active Chairman of DiskSites, Inc., which was acquired by Expand Networks Ltd. in 2006.  Prof. Giladi co-founded InfoCyclone Inc. and was its 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.  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 served as President and General Manager of Syneron Medical Israel from 2009 to 2010.  Ms. Sarid served as the General Manager of Galil Medical Israel from 2007 to 2009.  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 to that 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. and Gilat Satellite Networks 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.
 
 36
 
 Shai Saul has served as a director of our company since December 2006 and is a member of our Audit Committee.  Mr. Saul has served as General Partner of DFJ Tamir Fishman Ventures, an Israeli technology-focused venture capital fund since 1999.  From 2000 to 2009, Mr. Saul served as Chairman of CopperGate Communications, a developer of chips for the in-home IPTV market (acquired by Sigma Designs), and during 2001, he served as CopperGate’s Chief Executive Officer.  From 1994 to 1999, Mr. Saul served as Executive Vice President of Aladdin Knowledge Systems Ltd. (NASDAQ: ALDN, acquired by SafeNet).  From 1993 to 1994, Mr. Saul served as Chief Executive Officer of Ganot Ltd., a cleantech company.  Mr. Saul also serves as a director of Allot Communications (NASDAQ: ALLT) and Superfish, among others.  His past investments and board positions include Native Networks, a developer of carrier-class optical Ethernet transport solutions (acquired by Alcatel), Wave Systems, fables developer of authentication chips (NASDAQ: WAVX), and Voltaire, a developer of scale-out solutions for high performance data centers(NASDAQ: VOLT acquired by Mellanox, NASDAQ:MLNX).  Mr. Saul holds an LL.B. degree from Tel Aviv University.
 
 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 its Chief Financial Officer 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 BioCancell Therapeutic Inc., 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 as Chairman of CellCure Neurosciences Ltd., a privately-held biotechnology company.  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 2010 to all of our directors and executive officers as a group (eight persons) for services in all capacities was approximately $719,000.  This amount includes amounts set aside 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, in the amount of approximately $44,000. This aggregate 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.  All our executive officers work full time for us.
 
 During the year ended December 31, 2010, we paid each of our outside directors approximately $1,630 per quarter and approximately $350 per meeting attended.  Our other non-executive directors did not receive any cash compensation during 2010, except for Mr. Benny Hanigal.  Effective as of January 1, 2008, we pay a $3,000 monthly fee to Mr. 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 2010, we granted our directors and executive officers as a group an aggregate of 88,644 restricted share units, 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.”
 
 37
 
 In addition, during 2010, as a remaining part of the Employee Exchange Offer, as described below under Item 7.B. “Major Shareholders and Related Party Transactions – Related Party Transactions,” our directors and executive officers as a group exchanged their EZchip Technologies Options for options to purchase 41,120 of our ordinary shares.
 
 We follow Israeli law and practice, instead of the NASDAQ Listing Rules 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.
 
 We do not follow the requirements of the NASDAQ Listing 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 two 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 Select 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 (including one outside director serving as the chair of the audit committee).  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.
 
 38
 
 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 Select 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 a majority of the shares voted by shareholders other than our controlling shareholders or shareholders who have a personal interest in the election of the outside directors (excluding a personal interest that is not related to a relationship with the controlling shareholders); or
  ·
the total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the election of the outside director does not exceed 2% 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 2012 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.
 
 Independent Directors.  In general, NASDAQ Listing 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.  In addition, under the Israeli Companies Law, a majority of the audit committee members must comply with the director independence requirements prescribed by the Israeli Companies Law.  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, NASDAQ and the Israeli Companies Law.
 
 Pursuant to a recent amendment to the Israeli Companies Law that will take effect in 2011, 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 (or a third of its board of directors in case the company has a controlling shareholder) will constitute individuals complying with certain independence criteria prescribed by the Israeli Companies Law, as well as certain other recommended corporate governance provisions.  Although the amendment has not taklen affect yet, we do not expect to include such provisions in our articles of association since our board of directors complies with the independence requirements and the corporate governance rules of NASDAQ and the Securities and Exchange Commission regulations.  In any event, as described above, a majority of our board of directors and all members of our audit committee are directors who comply with the independence criteria prescribed by the Israeli Companies Law.
 
 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(one of whom must serve as the chair of the audit committee), and a majority of the committee members must comply with the director independence requirements prescribed by the Israeli Companies Law.  The audit committee may not include the chairman of the board, or any director employed by us, by a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any director whose income is primarily dependent on a controlling shareholder, and may not include a controlling shareholder or any relatives of a controlling shareholder.  Individuals who are not permitted to be audit committee members may not participate in the committee's meetings other than to present a particular issue.  However, an employee who is not a controlling shareholder or relative may participate in the committee's discussions but not in any vote, and the company's legal counsel and corporate secretary may participate in the committee's discussions and votes if requested by the committee.
 
 39
 
 The audit committee's duties include providing assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by approving the fees of, and services performed by, our independent accountants and reviewing their reports regarding our accounting practices and systems of internal accounting controls.  The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management.  Under the Israeli Companies Law, the audit committee also is required to monitor deficiencies in the administration of our company, including by consulting with the internal auditor and independent accountants, to review, classify and approve related party transactions and extraordinary transactions, to review the internal auditor's audit plan and to establish and monitor whistleblower procedures.
 
 Under the Israeli Companies Law, a meeting of the audit committee is properly convened if a majority of the committee members attend the meeting, and in addition a majority of the attending committee members are independent directors within the meaning of the Israeli Companies Law and include at least one outside director.
 
 Under the NASDAQ Listing 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 Listing 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.
 
 Strategy Committee
  Our board of directors established a Strategy Committee to review and consider strategic directions for the company.  Our Strategy Committee currently consists of Benny Hanigal, Eli Fruchter, Prof. Ran Giladi and Shai Saul.  Our Chief Financial Officer, Dror Israel, and our Vice President – Business Development, Amir Eyal, regularly advise the committee’s members.
 
 Financial Statements Committee
  In connection with a new requirement of the Israeli Companies Law, which will become effective on May 14, 2011, we will be required to form a financial statements committee to review the company's financial statements and make recommendations to our board of directors with respect to the approval of the financial statements and specified issues concerning the financial statements.  The company's independent accountants are to be invited to each meeting of the committee, and the internal auditor is to be notified in advance of each meeting and shall have the right to participate.  Under the Israeli Companies Law and regulations, the composition and quorum requirements of the financial statements committee are generally the same as the composition and quorum requirements of the audit committee.  As permitted by the regulations, we currently intend to designate our audit committee to also serve as our financial statements committee and fulfill its statutory duties.
 
 Internal Auditor
  The Israeli Companies Law 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.
 
 40
 
 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 since 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.
 
 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.
 
 Chairman of the Board
 
 Under the Israeli Companies Law, the general manager of a company (or a relative of the general manager) may not serve as the chairman of the board of directors, and the chairman of the board of directors (or a relative of the chairman of the board of directors) may not serve as the general manager, unless approved by the shareholders by a special majority vote prescribed by the Israeli Companies Law.  The shareholder vote cannot authorize the appointment for a period of longer than three years, which period may be extended from time to time by the shareholders with a similar special majority vote.  The chairman of the board of directors shall not hold any other position with the company (except as general manager if approved in accordance with the above procedure) or in any entity controlled by the company, other than as chairman of the board of directors of a controlled entity, and the company shall not delegate to the chairman duties that, directly or indirectly, make him or her subordinate to the general manager.
 
 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.  A director is required to exercise independent discretion in fulfilling his or her duties and may not be party to a voting agreement with respect to his or her vote as a director.  A violation of these requirements is deemed a breach of the director's duty of loyalty.
 
 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 managing director, general manager, chief executive officer, executive vice president, vice president, or any other person assuming the responsibilities of any of these positions regardless of that person's title, or any director or any manager directly subordinate to the general manager.  Each person listed in the table under “Director and senior management” is an office holder.
 
 41
 
 Disclosure of Personal Interest of an Office Holder.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, and includes shares for which the person has the right to vote pursuant to a power-of-attorney.  “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” is defined as a spouse, sibling, parent, grandparent, descendant, and includes the descendant, sibling or parent of a spouse, as well as the spouse of any of the foregoing.
 
 Approval of Compensation of Office Holders.  Under the recent amendment to the Israeli Companies Law that will take effect in 2011, compensation arrangements for officers who are not directors require the approval of the audit committee and the board of directors.  The approval of the audit committee may be substituted with the approval of the compensation committee, provided that the compensation committee complies with all the requirements prescribed by the Israeli Companies Law regarding composition of the audit committee.  If the compensation arrangement is an immaterial amendment to an existing compensation arrangement of an officer who is not a director, the approval of the audit committee is sufficient.  Arrangements regarding the compensation of directors require the approval of the audit committee, the board and the shareholders, in that order.
 
 Approval of Other Transactions with Office Holders.  In the case of a transaction that is not an extraordinary transaction, after the office holder complies with the disclosure requirement described above, 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, insurance or compensation of an office holder, then the approvals of the company's audit committee and the board of directors are required, except if the compensation arrangement is a non-material amendment to an existing compensation arrangement of an officer who is not a director (in which case the approval of the audit committee is sufficient).  Exculpation, indemnification, insurance or compensation of a director also requires shareholder approval.  The audit committee may not approve the transaction unless, at the time of the approval, it complies with the audit committee composition and quorum requirements prescribed by the Israeli Companies Law.
 
 Any person 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 such meeting or vote on such matter unless a majority of the board of directors or the audit committee has a personal interest in the matter, or if such person is invited by the chairman of the board of directors or audit committee, as applicable, to present the matter being considered.  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.
 
 Disclosure of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders.Underthe Israeli Companies Law, the disclosure requirements described above that apply to an officer holder, also apply 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 for this purpose.
 
 42
 
 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 or engagement of a controlling shareholder or his or her relative, as an officer holder or employee of our companyor as a service provider to the company, including through a company controlled by a controlling shareholder.
  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 a majority of the shares voted by shareholders who have no personal interest in the transaction; or
  ·
the total number of shares held by the disinterested shareholders that voted against the approval of the transaction does not exceed 2% of the aggregate voting rights of our company.
  Generally, the approval of such a transaction may not be for more than three years.  However, an extraordinary transaction, including a private placement with a controlling shareholder or in which a controlling shareholder has a personal interest that does not concern the terms of compensation or employment or engagement of a controlling shareholder or his or her relative, as an officer holder or employee of our company or as a service provider to the company, the transaction may be approved for a longer period if the audit committee determines that the approval of the transaction for a period of longer than three years is reasonable under the circumstances.
  Duties of Shareholders.  Under the Israeli Companies Law, a shareholder also has a duty to act in good faith towards the company and other shareholders and refrain from abusing his or her power in the company, including, among other things, voting in the general meeting of shareholders on the following matters:
 
 ·
any amendment to the articles of association;
 
 ·
an increase of the company’s authorized share capital;
 
 ·
a merger; or
 
 ·
approval of related party transactions that require shareholder approval.
 
 In addition, any controlling shareholder, any shareholder who can determine the outcome of a shareholder vote and any shareholder who, under the company’s articles of association, can appoint or prevent the appointment of an office holder, is under a duty to act with fairness towards the company.  The Israeli Companies Law also provides that a breach of the duty of fairness will be governed by the laws governing breach of contract; however, the Israeli Companies Law does not describe the substance of this duty.
 
 Indemnification of Directors and Officers; Limitations on Liability
  Indemnification of Office Holders
 
 Under the Israeli Companies Law, a company may, if permitted by its articles of association, indemnify an office holder for any of the following liabilities or expenses that they may incur due to an act performed or failure to act in his or her capacity as the company's office holder:
 
 ·
monetary liability imposed on the office holder in favor of a third party in a judgment, including a settlement or an arbitral award confirmed by a court;
  ·
reasonable legal costs, including attorneys’ fees, expended by an office holder as a result of an investigation or proceeding instituted against the office holder by a competent authority, provided that such investigation or proceeding concludes without the filing of an indictment against the office holder and either: no financial liability was imposed on the office holder in lieu of criminal proceedings, or a financial liability was imposed on the office holder in lieu of criminal proceedings with respect to an alleged criminal offense that does not require proof of criminal intent; and
  ·
reasonable legal costs, including attorneys’ fees, expended by the office holder or for which the office holder is charged by a court:
  43
 
 o
in an action brought against the office holder by the company, on behalf of the company or on behalf of a third party,
  o
in a criminal action from which the office holder is acquitted, or
  o
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.
 
 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 10, 2011, we had 157 employees. The following table presents the number of our employees categorized by activity as of December 31:
  As of December 31,2008


2009


2010Operations


9



9



9Research and development


84



86



105Sales and marketing


15



18



20General and administrative


8



9



9Total (1)


116



122



143
 
 44
 
 The following table presents the number of our employees categorized by geographic location as of December 31:
 
 As of December 31,2008


2009


2010Israel (1)


109



115



133United States


6



6



7China


1



1



3Total


116



122



143
 
 We believe that our company has good relations with its employees and we have never experienced a labor dispute, strike or work stoppage.
 
 Israeli labor laws are applicable to our company’s employees in Israel.  Such laws principally concern the length of the workday and the workweek, minimum wages for workers, minimum annual leave, insurance for work-related accidents, procedures for dismissing employees and determination of severance pay.  Israeli employers are also required to make payments to Israel’s National Insurance Institute with respect to employees.  In addition, certain provisions of the collective bargaining agreements between the “Histadrut” (Israel’s General Federation of Labor) and the Israeli Coordinating Bureau of Economic Organization apply to our employees in Israel pursuant to administrative orders extending them to all private sector employees.  According to such administrative orders, all Israeli employers are required to provide certain escalations of the wages in relation to the increases in the Israeli consumer price index as well as to provide minimum annual payments so as to cover vacation expenses.  All of our employees are covered by comprehensive life and pension insurance policies.
 
 All our officers, key employees and certain of our other employees are party to individual employment agreements.  We have entered into a non-disclosure and non-competition agreement with each of our executive officers and key employees.
 
 Pursuant to Israeli law, we are legally required to pay severance benefits upon certain circumstances, including the retirement or death of an employee or the termination of employment of an employee without due cause.  We currently fund our ongoing severance obligations for our Israeli employees by making monthly payments for severance insurance policies.  According to Section 14 to the Israeli Severance Pay Law, the payment of monthly deposits by a company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to the employees that have entered into agreements with the company pursuant to such Section 14.  Commencing July 2010, we entered into agreements with new employees who joined the company in order to implement such Section 14.  Therefore, the payment of monthly deposits by the company into recognized severance and pension funds or insurance policies with respect to the Israeli employees that joined us since July 2010 releases us from any additional severance obligation to those employees and therefore, since that date we incur no additional liability with respect to such employees.
 
 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 education” funds for our employees and they contribute 2.5% of base wages.  Our contribution is limited to the maximum amounts that are not considered taxable income to the employee.  Israeli employers and employees are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration.  The payments to the National Insurance Institute are determined progressively in accordance with wages.
 
 45
  E.
SHARE OWNERSHIP
  Beneficial Ownership of Executive Officers and Directors
  The following table sets forth certain information as of March10, 2011 for (i) each of our executive officers and directors that beneficially owns more than 1% of our outstanding ordinary shares, and (ii) our executive officers and directors as a group.  The information in the table below is based on 26,371,067 ordinary shares outstanding as of March 10, 2011.
 
 Name

Number of Shares(1)


PercentEli Fruchter (2)


751,858



2.82
%All directors and executive officers as a group (8 persons)(3)


1,096,014



4.07
%
 __________________________
  (1)
The number of ordinary shares beneficially owned includes the shares issuable pursuant to options that are exercisable within 60 days of the date of this table, and restricted share units that vest 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 information available to the company.  Includes options to purchase 247,962 ordinary shares that are exercisable within 60 days of the date of this table. The address for Mr. Fruchter is c/o EZchip Semiconductor Ltd., 1 Hatamar Street, P.O. Box 527, Yokneam 20692, Israel.
 
 (3)
As of March 10, 2011 all directors and executive officers as a group (8 persons) held options to purchase an aggregate 575,708 ordinary shares that are exercisable within 60 days of the date of this table and 13,410 restricted share units that vest within 60 days of the date of this table.  Such options have a weighted average exercise price of $9.84and expire between January 2012 and September 2016.
 
 None of our directors and executive officers beneficially owns 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.
 
 As of December 31, 2010, our executive officers and directors as a group held options to purchase an aggregate of 851,151 of our ordinary shares.  The weighted average exercise price of these options was $10.93and their expiration dates ranged from January 2012 and September 2016.  As of December 31, 2010, our executive officers and directors as a group held an aggregate of 113,104 restricted share units.
 
 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 and October 2010.  In 2007, the plan was renamed the 2003 Amended and Restated Equity Incentive Plan, or the 2003 Israel Plan.  The 2003 Israel Plan is administered by our 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.  In October 2010, our Board of Directors approved an amendment to the 2003 Israel Plan increasing the number of ordinary shares that may be granted under such plan by 2,100,000 shares.
 
 46
 
 As of December 31, 2010, 2,071,799 ordinary shares were available for future issuances 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.
  As of December 31, 2010, options to purchase an aggregate of 1,773,992 ordinary shares were outstanding under the 2003 Israel Plan, with a weighted average exercise price of $14.37 per share and expiration dates ranging from January 2012to October 2016.  In addition, as of December 31, 2010, 433,101 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.  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 our company, 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.  In July 2010, our shareholders approved an amendment to the 2007 U.S. Plan increasing the number of ordinary shares that may be granted under such plan by 500,000 shares.
 
 As of December 31, 2010, 479,600 ordinary shares were available for future issuance 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.
 
 As of December 31, 2010, options to purchase an aggregate of 253,991 ordinary shares were outstanding under the 2007 U.S. Plan, with a weighted average exercise price of $12.0 per share and expiration dates ranging from June 2011to October 2016, including options to purchase an aggregate of 60,307 ordinary shares granted in December 2009 as part of the Employee Exchange Offer.  In addition, as of December 31, 2010, 45,850 RSUs were outstanding under the 2007 U.S. Plan.
 
 2009 Israel Equity Plan.  In November 2009, EZchip Semiconductor adopted the 2009 Israel Equity Plan.  The plan was adopted in connection with the Employee Exchange Offer, as described below under Item 7.B. “Major Shareholders and Related Party Transactions – Related Party Transactions,” for the sole purpose of issuing options to purchase our ordinary shares to our former and current Israeli employees who elect to exchange their options to purchase ordinary shares of EZchip Technologies  The 2009 Israel Equity Plan is administered by our Board of Directors or a committee of the Board that is delegated authority to act as the administrator.  Under the 2009 Israel Plan, we may grant options to purchase our ordinary shares to former and current employees, directors, consultants, advisers and service providers of our company and subsidiaries in exchange for their options to purchase ordinary shares of EZchip Technologies.  The 2009 Israel Equity Plan provides for the awards granted to have a maximum exercise period of ten years from the date of grant.  All awards granted in 2009 and 2010 under the 2009 Israel Equity Plan were immediately exercisable.
 
 As of December 31, 2010, options to purchase an aggregate of 374,126 ordinary shares were outstanding under the 2009 Israel Equity Plan, with a weighted average exercise price of $2.84 per share and expiration dates ranging from May 2011to February 2016, all of which were granted in December 2009 and during 2010 as part of the Employee Exchange Offer.
 
 47
 
 As of December 31, 2010, 952,940 ordinary shares were available for future issuance under the 2009 Israel Equity Plan, which amount is reduced by one share for each option that we grant under the plan.  However, we do not intend to grant any additional options pursuant to the 2009 Israel Equity Plan.
 
 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 expired seven to ten years from the date of the grant, and were 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, since 2008 all incentive awards to EZchip Technologies employees consist of options or RSUs to purchase ordinary shares of our company.
 
 In December 2009 and during 2010, as part of the Employee Exchange Offer, as described below under Item 7.B. “Major Shareholders and Related Party Transactions – Related Party Transactions,” all of the outstanding options to purchase ordinary shares of EZchip Technologies were exchanged for a combination of options to purchase our ordinary shares and cash.
 
 As of December 31, 2010 and following the completion of the Employee Exchange Offer, there were no outstanding options to purchase ordinary shares of EZchip Technologies.
 
 ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
  A.
MAJOR SHAREHOLDERS
  The following table sets forth certain information as of March 10, 2011 (unless otherwise indicated below) for each shareholder known to us to beneficially own more than 5% of our outstanding ordinary shares.  The information in the table below is based on 26,371,067ordinary shares outstanding as of March 10, 2011.  Each of our outstanding ordinary shares has identical rights in all respects.
  Name

Number of Shares(1)


PercentEmpire Capital Management, L.L.C. and Empire GP, L.L.C (2)


1,636,900



6.2
%
 __________________________
 
 (1)
The number of ordinary shares beneficially owned includes the shares issuable pursuant to options that are exercisable within 60 days of the date of this table, and RSUs that vest within 60 days of the date of this table.  Shares issuable pursuant to such options or RSUs 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/A filed with the Securities and Exchange Commission on February 15, 2011.  The Schedule 13G/A reports that each of such entities disclaims beneficial ownership of our ordinary shares.
  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.  Following the completion of the underwritten public offering in December 2009, as described below under Item 7.B. “Major Shareholders and Related Party Transactions – Related Party Transactions,” the funds affiliated with Goldman, Sachs & Co. and JK&B Capital filed Schedule 13G/As with the Securities and Exchange Commission on December 22, 2009 and December 24, 2009, respectively, to report that they no longer beneficially owned any of our ordinary shares.
  48
  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.
 
 Empire Capital Management, L.L.C. and Empire GP, L.L.C.On August 30, 2010, Empire Capital Management, L.L.C., or Empire Management, together with Empire Capital Partners, L.P., or Empire Partners, Empire GP, L.L.C., or Empire GP, Scott A. Fine and Peter J. Richards filed a Schedule 13G with the Securities and Exchange Commission.  The Schedule 13G indicated that Messrs. Fine and Richard each had beneficial ownership of 5.5% of our ordinary shares, of which 4.0% are beneficially held by Empire Management and 1.5% are beneficially held by each of Empire Partners and Empire GP.  On November 23, 2010, such reporting persons filed Amendment No. 1 to Schedule 13G with the Securities and Exchange Commission reporting that Messrs. Fine and Richard each had beneficial ownership of 10.4% of our ordinary shares, of which 7.4% are beneficially held by Empire Management and 3.0% are beneficially held by each of Empire Partners and Empire GP.  On February 15, 2011, such reporting persons filed Amendment No. 2 to Schedule 13G with the Securities and Exchange Commission reporting that Messrs. Fine and Richard each had beneficial ownership of 6.3% of our ordinary shares, of which 4.4% are beneficially held by Empire Management and 1.9% are beneficially held by each of Empire Partners and Empire GP.  Messrs. Fine and Richards are the Member of Empire GP and Empire Management and in their capacities direct the operations of Empire GP and Empire Management.  Each of the reporting persons disclaims beneficial ownership of our ordinary 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 21, 2011, there were 37 holders of record of our ordinary shares, including 31holders of record residing in the United States holding approximately 98.43% of the aggregate 26,371,739 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 98.34% 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 BlueRunVentures(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.
 
 49
 
 2009 Public Offering.In December 2009, we completed an underwritten public offering of 4,335,605 of our ordinary shares at a public offering price of $10.50 per share.  Of such shares, 712,618 ordinary shares were sold by us and 3,622,987 ordinary shares were sold by funds affiliated with Goldman, Sachs & Co. and JK&B Capital, who received their shares in exchange for their shares in EZchip Technologies.  We used all our net proceeds from the December 2009 public offering to purchase a portion of the securities of EZchip Technologies tendered in the Employee Exchange Offer, as described below.  We did not receive any proceeds from the sale of the ordinary shares by funds affiliated with Goldman, Sachs & Co. and JK&B Capital in the underwritten public offering.  On January 14, 2010, we issued and sold an additional 106,893 ordinary shares in the underwritten public offering following the exercise by the underwriter of its over-allotment option for a total consideration of approximately $1.1 million.
  Employee Exchange Offer.In December 2009, we completed an exchange offer pursuant to which we exchanged:
  ·
ordinary shares of EZchip Technologies, or EZchip Technologies Shares, held by current and former employees for a combination of cash and our ordinary shares; and
  ·
options to purchase EZchip Technologies Shares, or EZchip Technologies Options, held by current and former employees for a combination of cash and options to purchase our ordinary shares.
  We refer to this exchange as the Employee Exchange Offer.  All the cash used in the Employee Exchange Offer represents proceeds the company received from the December 2009 public offering.
  Upon completion of the Employee Exchange Offer:
 
 ·
we issued 243,774of our ordinary shares and options to purchase 1,642,340of our ordinary shares to current and former employees (including options to purchase 486,428 of our ordinary shares to our directors and executive officers); and
  ·
we acquired from employees and former employees of EZchip Technologies an aggregate of 2,707,948 EZchip Technologies Shares (including ordinary shares resulting from the exercise of options) for approximately $7.1 million, including 859,153 EZchip Technologies Shares from our directors and executive officers.
 
 During 2010, we issued options to purchase 41,120of our ordinary shares to our directors and an executive officer in exchange for their EZchip Technologies Options.
 
 Following the completion of the Employee Exchange Offer, we increased our ownership interest in EZchip Technologies to 100%.  The dilution of each of our shareholder's percentage of ownership in our company as a result of the Employee Exchange Offer was substantially offset by the increase in our company’s holdings in EZchip Technologies to 100% of the outstanding shares.
  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 16bto the consolidated financial statements.
 
 50
 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 Approved Enterprise and Privileged Enterprises 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, 2010.
 
 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.  From January 4, 2008 until December 31, 2010, our ordinary shares were listed on the NASDAQ Global Market, and since January 1, 2011, our ordinary shares have been listed on the NASDAQ Global Select Market.  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 Select Market (for periods from January 1, 2011), the NASDAQ Global Market (for periods from January 4, 2008 through December 31, 2010) 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 Select Market (for periods from January 1, 2011), the NASDAQ Global Market (for periods from January 4, 2008 through December 31, 2010) and the NASDAQ Capital Market (for periods prior to January 4, 2008) and the Tel Aviv Stock Exchange:
 
 51
  NASDAQ


Tel Aviv Stock ExchangeYear

High


Low


High


Low2006

$
15.24


$
5.02


$
15.26


$
5.252007

$
24.89


$
11.20


$
24.72


$
11.432008

$
18.79


$
5.63


$
19.32


$
6.852009

$
18.12


$
9.95


$
17.66


$
10.512010

$
29.73


$
11.62


$
29.49


$
11.78
 
 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 Select Market (for periods from January 1, 2011), the NASDAQ Global Market (for periods from January 4, 2008 through December 31, 2010) and the NASDAQ Capital Market (for periods prior to January 4, 2008) and the Tel Aviv Stock Exchange:
 
 NASDAQ


Tel Aviv Stock ExchangeHigh


Low


High


Low2008First quarter

$
18.79


$
9.65


$
19.32


$
8.34Second quarter

$
17.87


$
10.00


$
18.54


$
9.86Third quarter

$
18.70


$
10.74


$
18.76


$
11.25Fourth quarter

$
16.18


$
5.63


$
15.68


$
6.852009First quarter

$
18.12


$
9.95


$
17.25


$
10.81Second quarter

$
17.14


$
12.25


$
17.66


$
12.69Third quarter

$
16.63


$
11.06


$
16.96


$
11.23Fourth quarter

$
14.23


$
10.55


$
14.59


$
10.512010First quarter

$
20.25


$
11.62


$
20.52


$
11.78Second quarter

$
20.80


$
14.97


$
20.32


$
15.28Third quarter

$
26.61


$
16.93


$
26.45


$
16.59Fourth quarter

$
29.73


$
22.64


$
29.49


$
23.11
 
 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 Select Market (for periods from January 1, 2011), the NASDAQ Global Market (for periods until December 31, 2010) and the Tel Aviv Stock Exchange:
 
 NASDAQ


Tel Aviv Stock ExchangeHigh


Low


High


LowOctober 2010

$
25.91


$
22.68


$
25.91


$
23.11November 2010

$
26.00


$
22.64


$
25.98


$
23.17December 2010

$
29.73


$
24.35


$
29.49


$
23.88January 2011

$
33.20


$
28.17


$
33.91


$
28.11February 2011

$
33.48


$
27.00


$
33.74


$
25.17March 2011 (through March28, 2011)

$
30.40


$
26.55


$
30.91


$
26.61
 
 B.
PLAN OF DISTRIBUTION
  Not applicable
 
 C.
MARKETS
  See Item 9A. “The Offer and Listing - Offer and Listing Details.”
 
 52
  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.
 
 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.
 
 53
 
 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.  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.
 
 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 no voting rights.
 
 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.
 
 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.
 
 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 25% or more 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 more than 45% of the voting rights in the company.
 
 54
 
 Under the Israeli Companies Law, a person may not purchase shares of a public company if, following the purchase, the purchaser would hold more than 90% of the company's shares or of any class of shares, unless the purchaser makes a tender offer to purchase all of the target company's shares or all the shares of the particular class, as applicable.  If, as a result of the tender offer, either:
 
 ·
the purchaser acquires more than 95% of the company's shares or a particular class of shares and a majority of the shareholders that did not have a personal interest accepted the offer; or
 
 ·
the purchaser acquires more than 98% of the company's shares or a particular class of shares;
 
 then, the Israeli Companies Law provides that the purchaser automatically acquires ownership of the remaining shares.  However, if the purchaser is unable to purchase more than 95% or 98%, as applicable, of the company's shares or class of shares, the purchaser may not own more than 90% of the shares or class of shares of the target company.
 
 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, although in the case of shares of a foreign corporation that are traded on a stock exchange, the tax may be postponed subject to certain conditions.
 
 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 was for an initial term of three years and automatically renews for additional one-year terms 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.
 
 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 was for an initial term of three years and is automatically 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, 2008, 2009 and 2010, Juniper Networks paid us under the agreement $18.4 million, $21.6 million and $25.0 million, respectively.  This summary is qualified in its entirety by the text of the agreement, which is an exhibit to this Annual Report.
 
 On October 30, 2000, EZchip Technologies and International Business Machines Corporation, or IBM, entered into a Customs Sales Agreement (Base Agreement), as amended.  Under the agreement, IBM agreed to perform, at the request of EZchip Technologies, various ASIC services and to manufacture certain ASIC products for EZchip Technologies.  IBM 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, IBM manufactures our standard NP-3 network processor using the 90 nanometer process.  The agreement was for an initial term of five years, which term is extended through the expiration term of any outstanding agreement to provide services under the agreement.  Accordingly, the agreement is currently extended through December 31, 2014.  This summary is qualified in its entirety by the text of the agreement, as amended, which is an exhibit to this Annual Report.
 
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 On April 12, 2006, EZchip Technologies and Marvell entered into a Technology Development, License and Manufacturing Agreement, as amended September 2006, and EZchip Technologies, Marvell and Cisco entered into a Business Term Agreement, dated November 15, 2006. Pursuant to the agreements with Marvell and Cisco, Marvell is responsible for the manufacturing and selling of the customized version of our NP-3 processor to Cisco and pays us a fixed royalty fee per each chip sold to Cisco.  Cisco entered production with our NP-3 during the first quarter of 2009 and through Marvell accounted for approximately 20% of our 2010 revenues.  On September 24, 2009, EZchip Technologies and Marvell further amended the Technology Development, License and Manufacturing Agreement, and on December 7, 2010, EZchip Technologies, Marvell and Cisco entered into a new Business Term Agreement relating to our NP-4 processor, which applied substantially the same commercial terms that apply to our NP-3 processor also to the NP-4.  In addition, the new agreement with Marvell provides that Marvell will also act as the ASIC vendor of the general version of the NP-4 processor that will be sold by us directly to all NP-4 customers, excluding Cisco who will buy the special version NP-4 processor from Marvell. NP-4 has not yet entered into production. We expect Cisco, through Marvell, to become our largest customer and the main driver of our revenue growth in the coming years. The agreements do not provide for any minimum purchase orders by EZchip, Marvell or Cisco, or for a specific termination date. For the years ended December 31, 2008, 2009 and 2010, Marvell paid us under the agreements $0.7 million, $3.1 million and $12.5 million, respectively.  This summary is qualified in its entirety by the text of the agreements, which are exhibits 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.
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 General corporate tax structure in Israel
  Israeli companies were generally subject to corporate tax at the rate of 25% of their taxable income in 2010.  The corporate tax rate was reduced to 24% in 2011 (according to Amendment 147 of The Israeli Tax Ordinance).  Corporate tax rates applicable for 2008 and 2009 were 27% and 26%, respectively.
 
 In July 2009, the Knesset passed the Law for Economic Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and 2010), 2009, which prescribes, among other things, an additional gradual reduction in the rates of the Israeli corporate tax and real capital gains tax starting in 2011 to the following tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%.
  In 2006, transfer pricing regulations came into force, following the introduction of Section 85A of the Israeli Tax Ordinance under Amendment 132.  The transfer pricing rules require that cross-border transactions between related parties be carried out implementing an arms' length principle and reported and taxed accordingly.
  In 2008, the Knesset passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law starting in 2008 and thereafter.  Starting in 2008, the results for tax purposes are measured in nominal values, excluding certain adjustments for changes in the consumer price index carried out in the period up to December 31, 2007.  The amended law includes, among other provisions, the elimination of the inflationary additions and deductions and the additional deduction for depreciation starting in 2008.
  Israeli companies are subject to 25% capital gains tax on gains earned after January 1, 2003.  Capital gains pertaining to assets acquired before that date are subject to a blended tax rate based on the relative periods of time held before and after that date. Capital gains earned by Israeli companies are subject to the gradually-decreasing corporate income tax rates.
 
 However, as discussed below, the rate may be effectively reduced for income derived from an Approved Enterprise and Privileged Enterprise.
 
 Law for the Encouragement of Capital Investments, 1959
  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 and qualify for certain tax benefits.
 
 Until April 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.
 
 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 two Privileged Enterprise programs are.
 
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 Tax benefits are available under the amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business income from export.  In order to receive the tax benefits, the amendment states that the company must make an investment in the Privileged Enterprise exceeding a certain percentage or a minimum amount specified in the Investment Law.  Such investment may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Privileged Enterprise, referred to as the Year of Election.  Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Privileged Enterprise and the company’s effective tax rate will be the result of a weighted combination of the applicable rates.  In this case, the minimum investment required in order to qualify as a Privileged Enterprise is required to exceed a certain percentage or a minimum amount of the company’s production assets before the expansion.
 
 The duration of tax benefits is subject to a limitation of the earlier of 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 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 applies 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 three programs under the Investment 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 and the third programs pursuant to the Investment Law as in effect after the amendment (Privileged Enterprise).  Our facilities in Israel have been granted Approved Enterprise status under the Investment Law.  All the 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 programs starts in the first year in which we generate taxable income from the enterprises subject to certain conditions.As mentioned above, the year’s limitation does not apply to the exemption period for the approved and privileged enterprises.
 
 We intend to continue to make 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 with respect to an Approved Enterprise, the criteria set forth in the applicable certificate of approval.  If we do 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 our 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.
 
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 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, 2010, we had not generated any income under the provisions of the Investment Law.
 
 Amendment to the Law for the Encouragement of Capital Investments, 1959
 
 On January 2011, new legislation amending the Investment Law was adopted.  Under this new legislation, a uniform corporate tax rate will apply to all qualifying income of certain Industrial Companies, as opposed to the current law’s incentives, which are limited to income from Approved Enterprises and Privileged Enterprises during their benefits period.  Under the new law, the uniform tax rate will be 10% in areas in Israel designated as Development Zone A and 15% elsewhere in Israel during 2011-2012, 7% and 12.5%, respectively, in 2013-2014, and 6% and 12%, respectively thereafter.  Certain “Special Industrial Companies” that meet certain criteria will benefit from further reduced tax rates of 5% in Zone A and 8% elsewhere.  The profits of these Industrial Companies will be freely distributable as dividends, subject to a 15% withholding tax (or lower, under an applicable tax treaty).  Under the transition provisions of the new legislation, we may decide to irrevocably implement the new law while waiving benefits provided under the Investment Law as currently in effect or to remain subject to the Investment Law as currently in effect.  Changing from the current law to the new law is permitted at any time.  We do not expect the new law to have a material effect on the tax payable on its Israeli operations in the foreseeable future.
 
 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, 2010, we had applied and received approval for grants totaling $12.5 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 for products for which we received OCS participation.  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 Cisco.  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:
 
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  ·
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, 2010, we had an outstanding contingent obligation to pay royalties in the amount of approximately $10.3 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 industrial enterprise owned by that company 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.
  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 according to the Investment Law).  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 20% unless a lower rate is applicable under a double taxation treaty, except that dividends distributed to an individual who is deemed “substantial shareholder” are subject to tax at the rate of 25%.  These rates are the final taxes in Israel on dividends for individual and corporate non-residents of Israel.  Foreign residents who have Israeli derived income for which tax was withheld at the source are generally exempt from the duty to file tax returns in Israel for such income.  This includes income from Israeli derived interest, dividends and royalties.
  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% (following amendment 147 to the Israeli Tax Ordinance the applicable withholding tax for dividends paid after January 1, 2006 is 20% of the dividend amount) or 15% in connection with an Approved Enterprise/Privileged Enterprise.
 
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 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).
  A U.S. corporation would have a reduced withholding rate on dividends if it were to own 10% or more of our voting rights under specified conditions.  The reduced withholding tax rate on the dividend would be 12.5%.  The U.S. corporation must own at least 10% of the voting shares during the portion of the company's tax year before the payment of the dividend and during the entire prior tax year.  The reduced rate is also subject to two other conditions.  First, not more than 25% of the company'sgross income for the prior tax year could consist of interest, other than interest received from banking, financing or similar businesses or from certain subsidiaries.  Second, the dividend cannot be derived from income during any period for which the companyis entitled to the reduced tax rate applicable to an Approved Enterprise/Privileged Enterprise.  In this case the withholding tax rate would be 15%.
  According to an amendment to the Israeli Tax Ordinance, which became effective in 2003, since EZchip Semiconductor's ordinary shares are traded on the TASE and on NASDAQ, gains on the sale of ordinary shares held by non-Israeli resident investors for tax purposes will generally be exempt from Israeli capital gains tax, subject to the provisions of the Israeli tax legislation.  Under the terms of the tax treaty, Israel may tax capital gains realized by shareholders resident in the United States on a sale of ordinary shares of EZchip Semiconductor if certain conditions exist, however, such right is subject to the above exemption.
 
 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 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%.  This limitation does not apply if the company qualifies as a foreign investors’ company according to the Investment Law.  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.
 
 However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
 Capital Gains Taxes Applicable to Israeli Residents
 
 As of January 1, 2006, the tax rate on capital gains to a non-principal individual shareholder (those persons holding less than 10% of our ordinary shares), derived from sales of shares listed on a stock exchange, is 20% on the real capital gain accrued from January 1, 2003 and 25% to an individual principal shareholder.
 
 The real gain is based on the difference between the adjusted average value of the shares during the last three trading days before January 1, 2003 (or the adjusted original cost if it is higher than the adjusted average value) and the value of the shares at the date of sale. In the later case, the capital loss that might be set off is the difference between the adjusted average value and the value of the shares at the date of sale.
 
 Dealers in securities in Israel are taxed at regular tax rates applicable to business income. Companies resident in Israel are taxed at rates applicable to capital gains.
 
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 Foreign Exchange Regulations
 
 Dividends, if any, paid to the holders of our ordinary shares, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency.  If these amounts are paid in Israeli currency, they may be converted into freely repatriable U.S. dollar at the rate of exchange prevailing at the time of conversion.  In addition, the statutory framework for the potential imposition of exchange controls has not been eliminated, and may be restored at any time by administrative action.
 
 U.S. FEDERAL INCOME TAX CONSIDERATIONS
  The following summary sets forth the material U. S. federal income tax consequences applicable to the following persons who purchase, hold or dispose of the ordinary shares (“U.S. Shareholders”): (i) citizens or residents (as defined for U.S. federal income tax purposes) of the United States; (ii) corporations, or other entities taxable as corporations for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any political subdivision thereof; (iii) estates, the income of which is subject to U. S. federal income taxation regardless of its source; and (iv) trusts, if (a) a U.S. court is able to exercise primary supervision over its administration and (b) one or more U.S. persons have the authority to control all of its substantial decisions.  This discussion is based on the provisions of the U. S. Internal Revenue Code of 1986, as amended, or the Code, U.S. Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all as in effect as of the date of this Annual Report, and all of which are subject to change either prospectively or retroactively. This discussion generally considers only U.S. Shareholders that will hold the ordinary shares as capital assets for U.S. federal income tax purposes and does not consider (a) all aspects of U.S. federal income taxation that may be relevant to particular U.S. Shareholders by reason of their particular circumstances (including potential application of the alternative minimum tax), (b) U.S. Shareholders subject to special treatment under the U.S. federal income tax laws, such as financial institutions, insurance companies, broker-dealers and tax-exempt organizations, (c) U.S. Shareholders owning, directly or by attribution, 10% or more of 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.
 
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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, 2012 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.
 
 63
 
 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.  Should we conclude that we are a PFIC, we will provide U.S. Shareholders with the information necessary to make the qualified electing fund election.
 
 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.
 
 64
 
 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.
 
 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.  If we become a PFIC, U.S. Shareholders will be subject to additional information reporting requirements.
 
 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
 
 65
 
 You may obtain information on the operation of the Securities and Exchange Commission’s public reference room in Washington, D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330.   The Exchange Act file number for our Securities and Exchange Commission filings is 000-20860.
 
 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 (Electronic Data Gathering, Analysis, and Retrieval) system.
 
 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 carry out transactions involving foreign currency exchange derivative financial instruments.  The transactions are designed to hedge our exposure in NIS against the U.S. dollar.  We recognize derivative instruments as either assets or liabilities and measure those instruments at fair value in accordance with FASB ASC 815.  If a derivative meets the definition of a cash flow hedge and is so designated, changes in the fair value of the derivative are recognized in other comprehensive income until the hedged item is recognized in earnings.  The ineffective portion of a derivative designated as a hedge is recognized in earnings. If a derivative does not meet the definition of a hedge, the changes in the fair value are included in earnings.
 
 As of December 31, 2010, we had $4.6 million of outstanding forward contracts.  These contracts are for a period of up to 10 months.  Our accumulated other comprehensive income as of such date included $0.2 million unrealized gain on the forward contracts.
  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.
 
 66
 
 As of December 31, 2010, we had $32.0 million in cash and cash equivalents, $33.0 million in short term deposits and $36.3 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 2.2%, with average maturities of 19 months (maximum maturities of 3 years).
 
 The performance of the capital markets affects the values of the funds we hold in marketable securities.  These assets are subject to market fluctuations, such as the declines experienced in 2008 and the first six months of 2009.  In such case, the fair value of our investments may decline.  As of December 31, 2010, net unrealized gain in our marketable securities portfolio totaled $0.3 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, 2010, 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:
 
 67
  ·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions 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
  ·
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, 2010.  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, 2010, 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 controllers, 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.
  68
 
 ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 Independent Registered Public Accountant Firm Fees
  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,Services Rendered

2009


2010Audit fees (1)

$
160,000


$
250,000Audit-related fees (2)


150,000



--Tax fees (3)


10,000



20,000Total

$
320,000


$
270,000
 _____________________________
  (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 2009 relate to services provided in connection with our 2009 public offering.
  (3)
Tax fees for each of the years shown in the table relate to tax consulting with respect to our Privileged Enterprises, 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 Securities and Exchange Commission, 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 2010.
 
 ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
  None.
 
 ITEM 16G.
CORPORATE GOVERNANCE
 
 Under NASDAQ Listing Rule 5615(a)(3), foreign private issuers, such as our company, are permitted to follow certain home country corporate governance practices instead of certain provisions of the NASDAQ Listing Rules.  A foreign private issuer that elects to follow a home country practice instead of any of such provisions of the NASDAQ Listing Rules, 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.
 
 69
 
 On July 27, 2005 and November 12, 2009, we provided NASDAQ with a notice of non-compliance with certain NASDAQ Listing Rule requirements.  In practice, we do not comply with the following requirements, 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.
  ·
NASDAQ rules requiring that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans and arrangements, 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.  Under Israeli law and practice, in general, the approval of the board of directors is required for the establishment or amendment of equity based compensation plans and arrangements, unless the arrangement is for the benefit of a director, or a controlling shareholder, in which case audit committee and shareholder approval are also required.  Similarly, the approval of the board of directors is generally sufficient for a private placement unless the private placement involves a director, a controlling shareholder or is deemed a “significant private placement,” in which case shareholder approval, and, in some cases, audit committee approval, would also be required.  The Israeli Companies Law defines a “significant private placement” as a private placement (i) resulting in a party becoming a controlling shareholder, or (ii) involving the issuance of a 20% or more voting rights in the company, which (A) results in a 5% or more shareholder increasing its interest in the company or an offeree becoming a 5% or more shareholder, and (B) involves consideration that is not solely cash or public traded securities, or is not on fair market terms.
  PART III
 
 ITEM 17.
FINANCIAL STATEMENTS
  Not applicable.
 
 ITEM 18.
FINANCIAL STATEMENTS
  See pages F-1 to F-46 of this annual report.
  70
 
 ITEM 19.
EXHIBITS
  Exhibit No.

Description of Exhibit1.1

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)(3)4.1

EZchip Semiconductor Ltd. 2003 Amended and Restated Equity Incentive Plan (4)4.2

EZchip Semiconductor Ltd. 2007 U.S. Equity Incentive Plan (5)4.3

EZchip Semiconductor Ltd. 2009 Israel Equity Plan (6)4.4

Agreement for Purchase and Sale of Goods dated January 1, 2007, by and between Juniper Networks, Inc. and EZchip Technologies Ltd.(7)*4.5

Master ASIC Services Agreement dated April 29, 2004, by and between eSilicon Corporation and EZchip Technologies Ltd.(8)*4.6

Technology, Development, License and Manufacturing Agreement dated April 12, 2006 among Marvell International Ltd., Marvell Semiconductor Israel Ltd., and EZchip Technologies Ltd.*4.7

Amendment No.1 to Technology Development, License and Manufacturing Agreement,, dated September, 2006 by and between Marvell International Ltd. Marvell Semiconductor Israel Ltd., and EZchip Technologies Ltd.*4.8

Amendment No.2 to Technology Development, License and Manufacturing Agreement, dated September 24, 2009 by and between Marvell International Ltd., Marvell Israel (M.I.S.L.) Ltd., and EZchip Technologies Ltd.*4.9

Business Term Agreement dated November 15, 2006 among Cisco Systems, Inc, Marvell International Ltd., Marvell Semiconductor Israel Ltd., EZchip Technologies Ltd.*4.10

Business Term Agreement  dated December 7, 2010 among Cisco Systems, Inc, Marvell International Ltd., Marvell Israel Ltd., EZchip Technologies Ltd., and EZchip Inc.*4.11

Custom Sales Agreement (Agreement No. 00590) dated October 30, 2000 between EZchip Technologies Ltd. and International Business Machines Corporation*4.12

First Amended and Restated ASIC Attachment No. 2 to Custom Sales Agreement, dated January 29, 2008, by and between International Business Machines Corporation and EZchip Technologies Ltd.*4.13

Amendment No. 4 to Custom Sales Agreement dated January 29, 2008 between EZchip Technologies Ltd. and International Business Machines Corporation8.1

List of Significant Subsidiaries12.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act, as amended12.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act, as amended13.1

Certification of Principal Executive Officer pursuant to18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2

Certification of Chief Financial Officer pursuant to18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1

Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
 
 71
 
 __________________
 
 *
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 1.3 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2008, and incorporated herein by reference.
 
 (4)
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.
 
 (5)
Filed as Exhibit to the Registrant’s Form 6-K, dated December 3, 2007, and incorporated herein by reference.
 
 (6)
Filed as Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8, filed January 14, 2010, and incorporated herein by reference.
 
 (7)
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.
 
 (8)
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.
  72
 EZCHIP SEMICONDUCTOR LTD.
 AND ITS SUBSIDIARIES
  CONSOLIDATED FINANCIAL STATEMENTS
  AS OF DECEMBER 31, 2010
  IN U.S. DOLLARS
  INDEX
  PageReports of Independent Registered Public Accounting Firm
F-2 - F-3Consolidated Balance Sheets
F-4 - F-5Consolidated Statements of Operations
F-6Statements of Changes in Shareholders’ Equity
F-7 – F-8Consolidated Statements of Cash Flows
F-9 - F-10Notes to Consolidated Financial Statements
F-11 - F-46
 
 F - 1
  
  Kost Forer Gabbay & Kasierer

2 Pal-Yam Ave.

Haifa 33095, Israel

Tel:  972 (4)8654000

Fax: 972(3)5633443

www.ey.com.il
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Shareholders and Board of Directors of
 
 EZCHIP SEMICONDUCTOR LTD.
 
 We have audited the accompanying consolidated balance sheets of EZchip Semiconductor Ltd. ("the Company") and its subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
 
 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, 2010, 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 31, 2011 expressed an unqualified opinion thereon.
  /s/ Kost Forer Gabbay & KasiererHaifa, Israel
KOST FORER GABBAY & KASIERERMarch 31, 2011
A Member of Ernst & Young Global
 
 F - 2
 Kost Forer Gabbay & Kasierer

2 Pal-Yam Ave.

Haifa 33095, Israel

Tel:  972 (4)8654000

Fax: 972(3)5633443

www.ey.com.il
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Shareholders and Board of Directors of
 
 EZCHIP SEMICONDUCTOR LTD.
 
 We have audited EZchip Semiconductor Ltd ("the Company") and its subsidiaries internal control over financial reporting as of December 31, 2010, 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 20-F. 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, 2010, 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, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2010 and our report dated March 31, 2011 expressed an unqualified opinion thereon.
  /s/ Kost Forer Gabbay & KasiererHaifa, Israel
KOST FORER GABBAY & KASIERERMarch 31, 2011
A Member of Ernst & Young Global
  F - 3
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 U.S. dollars in thousands
 
 December 31,Note


2010


2009ASSETSCURRENT ASSETS:Cash and cash equivalents




$
31,985


$
34,748Short-term interest bearing deposits





33,000



3,000Available-for-sale marketable securities


4



36,325



29,490Trade receivables (net of allowance for doubtful accounts of $40 as of December 31, 2010 and 2009(






8,988



6,340Other accounts receivable and prepaid expenses


7



1,178



6,065Deferred tax assets, net


15



3,443



6,038Inventories


8



4,522



1,533Total current assets






119,441



87,214NON CURRENT ASSETS:Severance pay fund






5,209



4,099Long term investment and others






335



--Long term deferred tax assets


15



--



5,571Total non current assets






5,544



9,670PROPERTY AND EQUIPMENT, NET


9



419



394INTANGIBLE ASSETS, NET


10



1,181



3,869GOODWILL






96,276



96,276Total assets





$
222,861


$
197,423
  The accompanying notes are an integral part of the consolidated financial statements.
  F - 4
  EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS
 U.S. dollars in thousands (except share data)
 
 December 31,Note


2010


2009LIABILITIES AND SHAREHOLDERS’ EQUITYCURRENT LIABILITIES:Trade payables




$
1,289


$
1,963Other accounts payable and accrued expenses


11



6,569



10,218Total current liabilities






7,858



12,181LONG-TERM LIABILITIES:Accrued severance pay






5,974



4,779Total long-term liabilities






5,974



4,779SHAREHOLDERS’  EQUITY:Share capitalOrdinary shares of NIS 0.02 par valueAuthorized: 50,000,000 shares at December 31, 2010 and December 31, 2009, respectively;

Issued and outstanding: 26,033,876 and 24,314,990 shares at December 31, 2010 and December 31, 2009, respectively.






149



140Additional paid-in capital






271,959



257,078Accumulated other comprehensive income






540



507Accumulated deficit






(63,619
)


(77,262
)Total shareholders’ equity






209,029



180,463Total liabilities and shareholders’ equity





$
222,861


$
197,423
  The accompanying notes are an integral part of the consolidated financial statements.
 F - 5
  EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 U.S. dollars in thousands (except share and per share data)
 
 Year ended December 31,2010


2009


2008Revenues

$
61,998


$
40,046


$
33,566Costs of revenues


15,668



11,224



11,983Amortization of existing technology


1,915



1,985



2,083Gross profit


44,415



26,837



19,500Operating expenses:Research and development (net of grants and participations in the amount of $3,198, $3,049 and $3,011 for the years ended December 31, 2010, 2009 and 2008, respectively)


13,665



13,243



12,953In-process research and development charge


--



--



5,125Selling and marketing


6,266



5,495



4,430General and administrative


3,735



3,202



3,037Total operating expenses


23,666



21,940



25,545Operating income (loss)


20,749



4,897



(6,045
)Financial income, net (see Note 18)


1,130



902



1,408Income (loss) before taxes


21,879



5,799



(4,637
)Taxes benefit (taxes on income) - (see Note 15)


(8,236
)


11,675



--Net income (loss)


13,643



17,474



(4,637
)Less: Net loss (income) attributable to noncontrolling interest


--



(92
)


37Net income (loss) attributable to EZchip Semiconductor shareholders

$
13,643


$
17,382


$
(4,600
)Basic net income (loss) per share attributable to EZchip Semiconductor shareholders

$
0.54


$
0.74


$
(0.20
)Diluted net income (loss) per share attributable to EZchip Semiconductor shareholders

$
0.52


$
0.66


$
(0.20
)Weighted average number of Ordinary Shares used in computing basic net income (loss) per share


25,281,651



23,376,217



23,048,868Weighted average number of Ordinary Shares used in computing diluted net income (loss) per share


26,110,132



23,516,260



23,048,868
  The accompanying notes are an integral part of the consolidated financial statements.
  F - 6
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 
 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 U.S. dollars in thousands (except share data)
  EZchip Semiconductor Ltd. ShareholdersNumber of

ordinary

shares



Share

capital



Additional

paid-in

capital



Accumulated

other

comprehensive

income (loss)



Accumulated

deficit



Non

controlling

interest



Total

comprehensive

income (loss)



Total

shareholders’

equityBalance as of January 1, 2008


18,312,245


$
106


$
162,233


$
(11
)

$
(90,044
)

$
2,141


$
--


$
74,425Issuance of shares, net of issuance cost of $32


5,011,841



28



82,619



--



--



--



--



82,647Exercise of stock options


1,250



*
) --


3



--



--



--



--



3Vesting of Restricted Share Units


12,000



*
) --


*
) --


--



--



--



--



*
) --Cashless exercise of warrants


6,668



*
) --


*
) --


--



--



--



--



*
) --Stock-based compensation


--



--



2,501



--



--



--



--



2,501Stock-based compensation in EZchip Technologies


--



--



--



--



--



632



--



632Comprehensive loss:Unrealized loss on available-for-sale marketable securities


--



--



--



(671
)


--



--



(671
)


(671
)Unrealized loss on foreign currency cash flow hedges transactions


--



--



--



(23
)


--



--



(23
)


(23
)Net loss


--



--



--



--



(4,600
)


--



(4,600
)


(4,600
)Total comprehensive loss


























(5,294
)Balance as of December 31, 2008


23,344,004


$
134


$
247,356


$
(705
)

$
(94,644
)

$
2,773


$
--


$
154,914Exercise of stock options


6,313



*
) --


87



--



--



--



--



87Vesting of Restricted Share Units


8,281



*
) --


*
) --


--



--



--



--



*
) --Exercise of options in EZchip Technologies


--



--



95



--



--



1,549



--



1,644Stock-based compensation


--



--



4,400



--



--







--



4,400Stock-based compensation in EZchip Technologies






















945







945Purchase of noncontrolling interest in consideration of issuance of Company’s equity instruments, net of issuance cost of $213 (see Note 13)


956,392



6



5,140



--



--



(5,359
)


--



(213
)Comprehensive income:Unrealized gain on available-for-sale marketable securities


--



--



--



991



--



--



991



991Unrealized gain on foreign currency cash flow hedges transactions, net


--



--



--



221



--



--



221



221Net income


--



--



--



--



17,382



92



17,474



17,474Total comprehensive income

























$
18,686Balance as of December 31, 2009


24,314,990


$
140


$
257,078


$
507


$
(77,262
)

$
--






$
180,463
 
 (*) Less than $ 1
  The accompanying notes are an integral part of the consolidated financial statements.
  F - 7
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 
 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 
 U.S. dollars in thousands (except share data)
 
 EZchip Semiconductor Ltd. ShareholdersNumber of





Additional


Accumulated

other





Non


Total


Totalordinary


Share


paid-in


comprehensive


Accumulated


controlling


comprehensive


shareholders’shares


capital


capital


income


deficit


interest


income


equityIssuance of shares (see Note 13)


106,893



1



1,071



--



--



--



--



1,072Exercise of stock options


1,604,915



8



7,980



















7,988Vesting of Restricted Share Units


7,078



*
) --


*
) --


--



--



--



--



*
) --Stock-based compensation


--



--



5,830



--



--



--



--



5,830Comprehensive income:










--Unrealized gain on available-for-sale marketable securities


--



--



--



8



--



--



8



8Unrealized gain on foreign currency cash flow hedges transactions, net


--



--



--



25



--



--



25



25Net income


--



--



--



--



13,643



--



13,643



13,643Total comprehensive income


























13,676Balance as of December 31, 2010


26,033,876


$
149


$
271,959


$
540


$
(63,619
)


--






$
209,029
 
 (*) Less than $ 1
  Accumulated other comprehensive income

December 31,2010


2009Accumulated unrealized gain on available-for-sale marketable securities

$
317


$
309Accumulated unrealized gain on foreign currency cash flows hedges, net


223



198Accumulated other comprehensive income

$
540


$
507
 The accompanying notes are an integral part of the consolidated financial statements.
 
 
 F - 8
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 U.S. dollars in thousands
 
 Year ended December 31,2010


2009


2008Cash flows from operating activities:Net income (loss)

$
13,643


$
17,474


$
(4,637
)Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization


2,887



3,074



2,887In-process research and development charge


--



--



5,125Accumulated interest accretion and amortization of discount and premium on available-for-sale marketable securities


451



352



(45
)Realized loss (gain) related to sale of available-for-sale marketable securities


(12
)


6



27Increase (decrease) in accrued severance pay, net


85



(253
)


301Stock-based compensation related to options and RSUs granted to employees of the Company and EZchip Technologies


5,830



5,345



3,133Increase in trade receivables, net


(2,648
)


(1,300
)


(2,163
)Decrease (increase) in other accounts receivable and prepaid expenses


405



(667
)


557Increase in other long term receivable


(135
)


--



--Decrease (increase) in inventory


(2,989
)


2,351



(250
)Decrease (increase) in deferred tax asset


8,162



(11,675
)


--Increase (decrease) in trade payables


(513
)


866



634Increase in other accounts payable and accrued expenses


862



1,510



673Net cash provided by operating activities


26,028



17,083



6,242Cash flows from investing activities:Investment in available-for-sale marketable securities


(23,671
)


(14,354
)


(22,697
)Investment in short-term deposits


(37,000
)


(3,000
)


--Proceeds from redemption of short-term deposits


7,000



--



--Proceeds from sale and redemption of available-for-sale marketable securities


16,405



12,723



5,973Purchase of property and equipment


(385
)


(110
)


(110
)Cash paid for investment in affiliated Company


(200
)


--



--Net cash used in investing activities

$
(37,851
)

$
(4,741
)

$
(16,834
)
  The accompanying notes are an integral part of the consolidated financial statements.
  F - 9
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 U.S. dollars in thousands
 
 Year ended December 31,2010


2009


2008Cash flows from financing activities:Issuance of shares, net of issuance costs

$
1,072


$
(213
)

$
(32
)Proceeds from exercise of options in the Company


7,988



87



3Proceeds from exercise of options in EZchip Technologies


--



193



37Proceeds from exercise of options in EZchip Technologies in connection with Share Purchase transaction


--



1,451



--Net cash provided by financing activities


9,060



1,518



8Increase (decrease) in cash and cash equivalents


(2,763
)


13,860



(10,584
)Cash and cash equivalents at the beginning of the year


34,748



20,888



31,472Cash and cash equivalents at the end of the year

$
31,985


$
34,748


$
20,888a. Non-cash activities:1. Purchase of property and equipment in credit

$
48


$
209


$
--2. EZchip Technologies shares acquisition (see Note 3):EZchip Technologies’ tangible assets acquired by the

Company


--



--



24,295Intangible assets acquired:Existing technology


--



--



3,986Backlog


--



--



97Customer relationships


--



--



2,433Goodwill


--



--



46,743In-process research and development


--



--



5,125Value of  EZchip Technologies’ shares acquired

$
--


$
--


$
82,6793. Purchase of noncontrolling interest in consideration of

issuance of the Company’s equity instruments, net of

issuance cost of $213 (see also Note 3)

$
--


$
5,359


$
--
  The accompanying notes are an integral part of the consolidated financial statements.
 F - 10
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 1:- GENERAL
 
 a.
EZchip Semiconductor 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 is a fabless semiconductor company that develops and markets Ethernet network processors for networking equipment.
 
 EZchip Technologies Ltd. (“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, 2010, the Company holds 100% of EZchip Technologies’ outstanding 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.  From January 4, 2008 through December 31, 2010, the Company's Ordinary Shares were listed on the NASDAQ Global Market, and since January 1, 2011, the Company's Ordinary Shares have been listed on the NASDAQ Global Select Market. On January 17, 2008, the Company's NASDAQ ticker symbol changed to “EZCH.”  Since April 1, 2002, the Company's Ordinary Shares have also been listed for trading 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. The most significant assumptions are employed in estimates used in determining values of intangible assets, tax assets and tax liabilities, stock-based compensation costs, financial instruments with no observable market quotes. Actual results may differ from those estimates.
 
 F - 11
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 b.
Financial statements in U.S. dollars:
 
 The currency of the primary economic environment in which the operations of the Company and its subsidiaries are conducted is the U.S. dollar. Most of the revenues are denominated and earned in U.S. dollars, and most purchases of materials and components are made in U.S. dollars. Financing and investing activities, including equity transactions and cash investments, are made in U.S. dollars and most of 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.
 
 Monetary accounts maintained in currencies other than the U.S. dollar are remeasured into U.S. dollars in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 830 “Foreign currency matters.” 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.
Short-term interest bearing deposits
 
 The Company considers all highly liquid investments that are convertible to cash with original maturities of more than three months and less than one year as short-term deposits. As of December 31, 2010 and 2009, the Company held short-term interest bearing deposits in the amount of $33,000 and $3,000, respectively, with a weighted average interest of 1.6%.
 
 f.
Marketable securities:
 
 The Company accounts for its investments in marketable securities in accordance with FASB ASC 320 “Investments - 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, accumulated other comprehensive income (loss). Realized gain and loss on sales of available-for-sale marketable securities are included in the Company's statements of operations and are derived using the specific identification basis for determining the cost of the available-for-sale marketable securities. The amortized cost of the available-for-sale marketable securities is adjusted for amortization of premiums and accretion of discount to maturity. Such amortization and accretion, together with interest on available-for-sale marketable securities, are included in the financial income, net.
 
 F - 12
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 f.
Marketable securities (cont.):
 
 The Company recognizes an impairment charge when a decline in the fair value of its available-for-sale 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 length of time the investment has been in a loss position, the extent to which the fair value has been less than the Company's cost basis, the investment’s financial condition and the near-term prospects of the issuer. The Company adopted FASB ASC 320-10-65 effective January 1, 2009, which requires an other-than-temporary impairment for debt securities to be separated into (a) the amount representing the credit loss and (b) the amount related to all other factors (provided that the Company does not intend to sell the security and it is not more likely than not that it will be required to sell it before recovery). The Company classifies its marketable securities as available-for-sale and marks them to market with changes to other comprehensive income until realization or occurrence of other than temporary impairment loss.
 
 g.
Inventories:
 
 Inventories are stated at the lower of cost or market value. The Company writes down the carrying value of its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future demands and market conditions. During the years ended December 31, 2010, 2009 and 2008, the Company's write downs were immaterial.
 
 Cost is determined as follows:
 
 Raw materials – using the weighted average cost method.
 
 Work in progress and finished products – using the weighted average cost method and calculated manufacturing costs.
 
 h.
Property and equipment:
 
 Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets.
 
 The annual depreciation rates are as follows:
 
 Percentage (%)Office furniture and equipment


6Computers, software and electronic equipment


33Leasehold improvements

Shorter of the term of the

lease or useful life
 
 F - 13
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 i.
Impairment of long-lived assets:
 
 The Company's long-lived assets and certain identifiable intangibles are reviewed for impairment in accordance with FASB ASC 360-10-35 “Property, Plant and Equipment - Subsequent Measurement,” whenever events or changes in circumstances indicate that the carrying amount of an asset (or an asset group) 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 2010, 2009 and 2008, no impairment losses were identified.
 
 j.
Investment in affiliated company:
 
 On July 4, 2010, the Company entered into a purchase agreement with a private company and invested approximately $200, in consideration for approximately 4% of the private company's share capital. The investment is stated at cost.
 
 The Company's investment in the affiliated company is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable, in accordance with ASC 323-10-35. As of December 31, 2010, no impairment losses have been identified.
 
 The above mentioned investment is reflected as in the "Long term investment and others" line item in the balance sheet as of December 31, 2010.
 
 k.
Goodwill impairment:
 
 Goodwill reflects the excess of the purchase price of an acquired business over the fair value of net assets acquired.
 
 The Company adopted FASB ASC 350 “Intangibles – Goodwill and other.” Under FASB ASC 350, goodwill is not amortized but instead is tested for impairment at least annually (or more frequently if impairment indicators arise) at the reporting unit level. The Company operates in one operating segment and such segment comprises its only reporting unit. The Company determined December 31 as the date of its annual impairment test.
 
 FASB ASC 350 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 the fair value of the reporting unit is compared with its carrying value. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. In such case, the second phase is then performed, and the Company measures impairment by comparing the carrying amount of the reporting unit's goodwill to the implied fair value of that goodwill. An impairment loss is recognized in an amount equal to the excess. During the years 2010, 2009 and 2008, no impairment losses were found.
 
 F - 14
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 k.
Goodwill impairment (cont.):
 
 As required by FASB ASC 820, "Fair Value Measurements and disclosures," the Company applies assumptions that market place participants would consider in determining the fair value of each reporting unit
 
 l.
Identifiable intangible assets:
 
 Intangible assets consist of purchased technologies, customer relationships and backlog and 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 FASB ASC 350. The weighted average remaining amortization period as of December 31, 2010 is approximately 1.2 years. (See also Note 10.)
 
 m.
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.
 
 n.
Severance pay:
 
 Until December 31, 2009, the Company's liability for severance pay for its Israeli employees was calculated pursuant to Israel's Severance Pay Law, 5723-1963 (the "Severance Law") based on the most recent monthly salary of its employees multiplied by the number of years of employment as of the balance sheet date for such employees. The Company's liability for severance pay was partly provided by monthly deposits of severance pay funds and insurance policies and the remainder 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 employee being entitled to severance pay pursuant to the Severance Law or labor agreements.  The value of the deposited funds is based on the cash surrendered value of these policies.
 
 According to Section 14 to the Severance Law, the payment of monthly deposits by a company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to the employees that have entered into agreements with such company pursuant to such Section 14.  Commencing July 2010, the Company entered into agreements with new employees who joined the Company in order to implement such Section 14.  Therefore, the payment of monthly deposits by the Company into recognized severance and pension funds or insurance policies with respect to the Israeli employees that joined the Company since July 2010 releases the Company from any additional severance obligation to those employees and therefore, since that date the Company does not incur additional liability with respect to such employees.
 
 The Company's balance sheet as of December 31, 2010 does not include a liability or funds in connection with severance for Israeli employees who agreed to the terms of Section 14.
 
 Severance expenses for the years ended December 31, 2010, 2009 and 2008 were $608, $227 and $800, respectively.
 F - 15
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 o.
Income taxes:
 
 The Company and its subsidiaries account for income taxes in accordance with FASB ASC 740, "Income Taxes." ASC 740 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 partial valuation allowance to reduce deferred tax assets to their estimated realizable value.
 
 On January 1, 2007, the Company adopted an amendment to FASB ASC 740. The amendment contains a two-step approach to recognizing and measuring uncertain tax positions. 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.
 
 p.
Net income (loss) per share:
 
 Basic net income (loss) per share is computed based on the weighted average number of Ordinary Shares outstanding during each year. Diluted net income (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 FASB ASC 260 “Earnings Per Share.”
 
 q.
Accounting for stock-based compensation:
 
 The Company measures and recognizes the compensation expense for all equity-based payments to employees and directors based on its estimated fair value in accordance with FASB ASC 718 “Compensation-Stock Compensation.”
 
 FASB ASC 718 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 based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. FASB ASC 718 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.
 
 F - 16
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 q.
Accounting for stock-based compensation (cont.):
 
 The Company measures the fair value of its options using the Black-Scholes-Merton option pricing model. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements over an historical term that is equivalent to the options expected term. The expected term of options granted in prior years was calculated using the simplified method (being the average between the vesting periods and the contractual life of the options in accordance with SAB 107, as replaced and amended, effective January 1, 2008, by SAB 110). The risk-free interest rate is based on the U.S. Treasury yield curve of 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.
 
 r.
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.
 
 Revenues from network processors chips and network-processor based systems are recognized upon delivery in accordance with SAB 104 "Revenue Recognition," 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 FASB ASC 985-605 “Software.” 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 FASB ASC 605-25 “Revenue Recognition” 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 and 2010, the Company signed agreements with Marvell Technology Group Ltd. ("Marvell"). According to the agreements, Marvell will manufacture and sell a customized version of the Company's NP-3 and NP-4 network processors to Cisco Systems, Inc. ("Cisco") and will pay the Company royalties for each chip it sells to Cisco.
 
 F - 17
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
  NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 r.
Revenue recognition (cont.):
 
 Royalty revenue is recorded in accordance with FASB ASC 605-45-45, “Considerations of Reporting Revenue Gross as a Principal versus Net as an Agent,” on a net basis. In accordance with the Company's agreements with Marvell, Marvell sends the Company royalty reports, once a month, which reflect prior month’s sales. Accordingly, the Company recognizes royalty revenues in the month that follows the month in which the sales are made by Marvell. (See also Note 16c.)
 
 s.
Advertising expenses:
 
 Advertising expenses are charged to the statement of operations, as incurred. Advertising expenses for the years ended December 31, 2010, 2009 and 2008 amounted to $26, $113 and $92, respectively.
 
 t.
Concentrations of credit risk:
 
 Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short term deposits, investments in available-for-sale marketable securities, foreign exchange contracts and trade receivables.
 
 The Company’s cash and cash equivalents and short-term deposits are invested with major banks mainly in Israel and the United States. The Company invests only in highly rated financial instruments and maintains its cash equivalents, with fixed and floating interest rate income. Deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company's investments have a high credit rating.
 
 The Company’s available-for-sale marketable securities include investments in highly rated marketable securities of U.S. and European corporations. Those investments are traded in the U.S. secondary market.
 
 The Company’s trade receivables are derived primarily from sales to customers and located mainly in North America, the Far East, Europe and Israel. The Company performs ongoing credit evaluations of its customers and has not experienced in recent years any unexpected material losses. An allowance for doubtful accounts is determined with respect to specific amounts that the Company has determined to be doubtful of collection.
 
 The Company has entered into foreign exchange forward contracts intended to protect against the changes in value of forecasted non-dollar currency cash flows related to employees salaries. These derivative instruments are designed to effectively hedge the Company’s non-dollar currency exposure. (See also Note 6.)
 
 F - 18
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
  NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 u.
Fair value of financial instruments:
 
 The carrying amounts of the Company's financial instruments, including cash and cash equivalents, available-for-sale marketable securities, short-term deposits, trade receivable, trade payable and other accounts payable and accrued liabilities, approximate fair value because of their generally short term maturities.
 
 The Company accounts for certain assets and liabilities at fair value under FASB ASC 820, “Fair Value Measurements and Disclosures.” 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, FASB ASC 820 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;
 
 Level 2 - Includes other inputs that are directly or indirectly observable in the marketplace, other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets with insufficient volume or infrequent transactions, or other inputs that are observable (model-derived valuations in which significant inputs are observable), or can be derived principally from or corroborated by observable market data; and
 
 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 Company categorized each of its fair value measurements in one of these three levels of hierarchy.
 
 The Company measures its debt securities and foreign currency derivative instruments at fair value. Government bonds, corporate bonds and foreign currency forward contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments (See also Note 6.)
 
 F - 19
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 v.
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.
 
 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. 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, EZchip Technologies' records a liability in the amount of the royalties for each individual contract when the related revenues are recognized, with a corresponding charge to cost of sales.  In the case of failure of a project that was partly financed by the OCS, EZchip Technologies will not be obligated to pay any such royalties.
 
 w.
Comprehensive income (loss):
 
 The Company accounts for comprehensive income (loss) in accordance with FASB ASC 220 “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) includes all changes in equity during a period related to the Company. The Company determined that its items of other comprehensive income (loss) relates to unrealized gain )loss( on available-for-sale marketable securities, and unrealized gain (loss) on foreign currency cash flow hedge.
 
 x.
Derivatives and hedging:
 
 The Company enters into forward exchange contracts in order to limit its exposure to exchange rate fluctuation associated with payroll expenses mainly incurred in New Israeli Shekels (“NIS”). (See also Note 5.)
 
 The Company accounts for derivatives and hedging in accordance with FASB ASC 815, “Derivatives and Hedging”. FASB ASC 815 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 be 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 in finance expense.
 
 F - 20
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 y.
Impact of recently issued accounting updates:
 
 In December 2010, the FASB’s Emerging Issues Task Force(“EITF”) issued Accounting Standards Update (“ASU”) 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts codified in ASC 350, “Intangibles - Goodwill and Other”. Under ASC 350, testing for goodwill impairment is a two-step test, in which Step 1 compares the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is less than its carrying value, Step 2 is completed to measure the amount of impairment, if any. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 if it appears more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity would consider whether there are any adverse qualitative factors indicating that an impairment may exist (e.g., a significant adverse change in the business climate). The amendments in ASU 2010-28 are effective for fiscal years and interim periods within those years beginning after December 15, 2010. Early adoption is not permitted for public entities. The Company’s adoption of ASU 2010-28 is not expected to have an impact on the Company’s consolidated financial statements.
 
 In December 2010, the EITF issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations codified in ASC 805, “Business Combinations.” This ASU responds to diversity in practice about the interpretation of the pro forma disclosure requirements for business combinations. When a public entity’s business combinations are material on an individual or aggregate basis, the notes to its financial statements must provide pro forma revenue and earnings of the combined entity as if the acquisition date(s) had occurred as of the beginning of the annual reporting period. The ASU clarifies that if comparative financial statements are presented, the pro forma disclosures for both periods presented (the year in which the acquisition occurred and the prior year) should be reported as if the acquisition had occurred as of the beginning of the comparable prior annual reporting period only and not as if it had occurred at the beginning of the current annual reporting period. The ASU also expands the supplemental pro forma disclosure requirements to include a description of the nature and amount of any material non-recurring adjustments that are directly attributable to the business combination.
 
 The amendments in ASU 2010-29 are effective for fiscal years and interim periods within those years beginning after December 15, 2010. Early adoption is not permitted for public entities. The Company’s adoption of ASU 2010-29 is not expected to have an impact on the Company’s consolidated financial statements.
 
 In April 2010, the FASB issued Accounting Standards Update, or ASU, No. 2010-17, Topic 605 — Revenue Recognition – Milestone Method (“ASU 2010-17”), which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. The amendments in ASU 2010-17 are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted; however, if a company elects to early adopt, the amendment must be applied retrospectively from the beginning of the year of adoption. The Company’s adoption of ASU 2010-17 is not expected to have an impact on the Company’s consolidated financial statements.
 
 F - 21
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
  NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 y.
Impact of recently issued accounting updates (cont.):
 
 In April 2010, the FASB issued ASU No. 2010-13, Topic 718 — Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in which the Underlying Equity Security Trades (“ASU 2010-13”), which provides guidance on the classification of a share-based payment award as either equity or a liability. A share-based payment award that contains a condition that is not a market, performance or service condition is required to be classified as a liability. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2010. The Company’s adoption of ASU 2010-13 is not expected to have an impact on the Company’s consolidated financial statements.
 
 In January 2010, the FASB issued ASU No. 2010-06, Topic 820 — Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which provides additional fair value measurement disclosures and clarifies certain existing disclosure requirements. Except for the requirement to disclose purchases, sales, issuances and settlements of Level 3 measurements on a gross basis, the disclosure and clarification requirements are effective for interim and annual reporting periods beginning after December 15, 2009. The requirement to separately disclose purchases, sales, issuances and settlements of recurring Level 3 measurements on a gross basis is effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. ASU 2010-06 relates to disclosure requirements only and as such does not impact the Company’s consolidated financial statements.
 
 In September 2009, the FASB reached a consensus on ASU 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”) and ASU 2009-14, Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements (“ASU 2009-14”). ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 establishes a selling price hierarchy that allows for the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple element arrangement where neither VSOE nor third-party evidence, or TPE, is available for that deliverable. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated.
 
 F - 22
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share data)
 
 NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 
 y.
Impact of recently issued accounting updates (cont.):
 
 The amendments in ASU 2009-13 and ASU 2009-14 are effective for fiscal years, and interim periods within those years, beginning of their first fiscal year beginning on or after June 15, 2010. Entities may elect to adopt this amendment through either prospective application for revenue arrangements entered into, or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. However, an entity must select the same transition method and same period for the adoption of both ASU 2009-13 and ASU 2009-14.
 
 The Company adopted ASU 2009-13 and ASU 2009-14 as of January 1, 2011. The Company’s adoption of ASU 2009-13 and ASU 2009-14 is not expected to have a material impact on the Company’s consolidated financial statements.
 
 NOTE 3:-   INVESTMENT IN EZCHIP TECHNOLOGIES
 
 As of December 31, 2010, the Company owns 100% of the issued and outstanding ordinary shares and preferred shares of EZchip Technologies Ltd.
 
 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 and ending on December 22, 2009, the Company entered into a series of exchange and acquisition transactions with EZchip Technologies' noncontrolling interest holders in order to increase the Company’s ownership interest in EZchip Technologies.  Pursuant to these transactions (as described below), the Company (i) issued to EZchip Technologies' noncontrolling interest holders Ordinary Shares of the Company and options to purchase Ordinary Shares of the Company in exchange for such noncontrolling interest shares and options in EZchip Technologies, and (ii) acquired such noncontrolling interest holders shares in EZchip Technologies (including shares resulting from the exercise of options).
 
 F - 23
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share data)
 NOTE 3:-   INVESTMENT IN EZCHIP TECHNOLOGIES (CONT.)
 
 Following are the transactions with the noncontrolling interest holders in EZchip Technologies since January 1, 2008:
 
 a.
On January 22, 2008, the Company acquired 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 the noncontrolling shareholders of EZchip Technologies.  The total fair value of the Company’s 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.
 
 As the accounting guidance in FASB ASC 810, “Consolidation” applies prospectively, acquisitions occurring prior to January 1, 2009 were accounted for according to the purchase method of accounting in accordance with prior GAAP, mainly FAS No. 141, “Business Combinations” and EITF 99-12 “Determination of the date for the market price of acquired securities issued in business combinations.” 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 as follows:
 
 Purchase price allocation

January 22,

2008EZchip Technologies’ tangible assets acquired:

$
24,295Intangible assets acquired:In-process research and development (1)


5,125Existing technology (2)


3,986Backlog (3)


97Customer relationships (4)


2,433Goodwill (5)


46,743Total consideration

$
82,679
 
 (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
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share data)
 NOTE 3:-   INVESTMENT IN EZCHIP TECHNOLOGIES (CONT.)
 
 b.
In November and December 2009, the Company offered current and former employees of EZchip Technologies (the “Employee Exchange Offer”) to exchange their ordinary shares and options to purchase ordinary shares of EZchip Technologies for Ordinary Shares and options to purchase Ordinary Shares of the Company and for cash (all the cash used in the Employees Exchange Offer represents proceeds the Company received from the December 2009 public offering). At such time those current and former employees of EZchip Technologies were the only noncontrolling interest holders in EZchip Technologies.
 
 Upon completion of the Employee Exchange Offer on December 22, 2009, the Company (i) acquired 2,707,948 ordinary shares of EZchip Technologies (including ordinary shares issued upon exercise of EZchip Technologies options) for an aggregate purchase price of $7,146 (the purchase price represents the total proceeds the Company received from the December 2009 public offering) (ii) granted options to purchase 1,642,340 of Company Ordinary Shares in exchange for 6,241,078 options to purchase ordinary shares of EZchip Technologies with a fair value of $13,225, and (iii) issued 243,774 Company Ordinary Shares in exchange for 926,442 ordinary shares of EZchip Technologies with a fair value of $2,560.
 
 Following the completion of the Employee Exchange Offer on December 22, 2009, all outstanding ordinary shares of EZchip Technologies and substantially all outstanding options to purchase ordinary shares of EZchip Technologies were held by the Company (except for options to purchase 156,250 ordinary shares of EZchip Technologies held by certain directors and an executive officer of EZchip Technologies that were exchanged during 2010 for options to purchase 41,120 Company Ordinary Shares).  As of December 31, 2010, all outstanding ordinary shares of EZchip Technologies and all outstanding options to purchase ordinary shares of EZchip Technologies were held by the Company.
 
 The Employee Exchange Offer and the acceleration of certain unvested EZchip Technologies options in connection with the Employee Exchange Offer was accounted for as a modification of terms, based on FASB ASC 718 with a resulting increase in the percentage held in EZchip Technologies according to the provisions of FASB ASC 810.
 
 Remaining compensation on account of original EZchip Technologies options surrendered was recognized immediately as EZchip Technologies accelerated its vesting period.
 
 The acquisition was accounted for in accordance with FASB ASC 810 guidance as a purchase of subsidiary’s shares from noncontrolling interest holders. In accordance with FASB ASC 810, the increase in the Company’s ownership interest in EZchip Technologies was accounted as an equity transaction. Therefore, no gain or loss was recognized in consolidated net income. The difference between the fair value of the consideration transferred and the carrying amount of the noncontrolling interest holders as recorded in Company's books immediately before the transaction was recognized in equity attributable to the Company (in Additional Paid In Capital).
 
 F - 25
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 4:-   MARKETABLE SECURITIES
 
 As of December 31, 2010 and 2009, all of the Company’s marketable securities were classified as available-for-sale.
 
 December 31, 2010


December 31, 2009Amortized cost


Gross

unrealized

gain


Gross

unrealized

loss


Fair

value


Amortized cost


Gross

unrealized

gain


Gross

unrealized

loss


Fair

valueAvailable-for-sale - matures within one year:Governmental debentures – fixed interest rate

$
1,053


$
--


$
--


$
1,053


$
--


$
--


$
--


$
--Corporate debentures – fixed interest rate


6,152



24



--



6,176



11,721



158



--



11,879Corporate debentures – floating interest rate


2,000



5



(5
)


2,000



--



--



--



--$
9,205


$
29


$
(5
)

$
9,229


$
11,721


$
158


$
--


$
11,879Available-for-sale - matures after one year through three years:Governmental debentures – fixed interest rate


2,654



27



--



2,681



--



--



--



--Corporate debentures – fixed interest rate


20,193



224



--



20,417



14,491



161



(29
)


14,623Corporate debentures – floating interest rate


3,956



42



--



3,998



2,969



30



(11
)


2,988$
26,803


$
293


$
--


$
27,096


$
17,460


$
191


$
(40
)

$
17,611$
36,008


$
322


$
(5
)

$
36,325


$
29,181


$
349


$
(40
)

$
29,490
 
 For the years ended December 31, 2010 and 2009, the net change in unrealized gain amounted to $8 and $991, respectively.
 
 The Company adopted FASB ASC 320-10-65 effective January 1, 2009, which requires an other-than-temporary impairment for debt securities to be separated into (a) the amount representing the credit loss and (b) the amount related to all other factors (provided that the Company does not intend to sell the security and it is not more likely than not that it will be required to sell it before recovery). The Company classifies its marketable securities as available-for-sale and marks them to market with changes to other comprehensive income until realization or occurrence of other than temporary impairment loss. The Company typically invests in highly-rated securities, and its policy generally limits the amount of credit exposure to any one issuer. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. Based on the above factors, the Company concluded that unrealized losses on all available-for-sale securities were not other-than-temporary and no credit loss was present for any of its investments. As such, the Company did not recognize any impairment charges on outstanding securities at the adoption date of the ASC or during the year ended December 31, 2010.
 
 F - 26
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
  NOTE 5:-   DERIVATIVES INSTRUMENTS
 
 The Company enters into derivative instruments with financial institutions in order to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company hedges the cash flows of employee portion payroll expenses denominated in NIS against the changes of the U.S. Dollar. These derivative instruments are designated as cash flows hedges and are carried out through forward contracts on the U.S. Dollar/NIS rate.
 
 Derivative instruments are recognized on the consolidated balance sheet as either assets or liabilities at fair value. The Company initially records changes in the fair value related to the effective portion (i.e., gains or losses) of the derivative instruments to Accumulated Other Comprehensive Income (“AOCI”) and subsequently reclassifies those gains or losses to the applicable expense in the statement of operations when the hedged transactions are recorded.
 
 As of December 31, 2010, the Company had outstanding forward contracts with a notional amount of $4,600.
 
 At December 31, 2010, the fair value of the Company’s cash flow hedges before tax effect was $293. Such an amount is expected to be reclassified from AOCI to the statement of operation within the next 10 months.
 
 The Company measured the fair value of the forward contracts in accordance with FASB ASC 820 "Fair Value Measurements and Disclosures," at level 2.
 
 During 2010, the Company reclassified net gain of $404 out of the other comprehensive income and recognized in the Company’s statements of operations as part of the payroll expenses.
 
 The fair value of the open foreign exchange contracts recorded by the Company on its consolidated balance sheets as of December 31, 2010 and December 31, 2009, as an asset is as follows:
 
 December 31,


December 31,2010


2009Derivatives designated as cash flow hedging instrumentsOther accounts receivable and prepaid expenses

$
293


$
264Total

$
293


$
264
 
 F - 27
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 5:-   DERIVATIVES INSTRUMENTS (CONT.)
 
 The activity related to the changes in net unrealized (losses) gains on cash flow hedges is as follows:
 
 Year ended December 31,2010


2009Net unrealized gains (losses) on cash flow hedges as of beginning balance (*)

$
264


$
(23
)Increase (decrease) in gains recognized in accumulated other comprehensive income


(375
)


410Realized gains (losses) reclassified into earnings


404



(123
)Net unrealized gains on cash flow hedges as of ending balance (*)

$
293


$
264
 
 (*) Excludes tax effect in the amount of $70 and $66 for the year ended December 31, 2010 and 2009, respectively.
 
 NOTE 6:-   FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures,” the Company measures its available-for-sale marketable securities and foreign currency forward contracts at fair value. Available-for-sale marketable securities and forward contracts 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 measured at fair value on a recurring basis consisted of the following types of instruments as of December 31, 2010:
 
 December 31, 2010


December 31, 2009Level 1


Level 2


Level 3


Level 1


Level 2


Level 3Money Market Funds (included in Cash and cash equivalents)


1,519



--



--



--



--



--Corporate bonds






36,325



--







29,490



--Foreign currency cash flow hedges


--



293



--



--



264



--Total

$
1,519


$
36,618


$
--


$
--


$
29,754


$
--
 
 F - 28
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 7:-   OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
 
 December 31,2010


2009Government authorities

$
211


$
542Prepaid expenses


375



236Foreign currency forward contracts


293



264Grants receivable from the OCS


--



178Withholding tax deposit (*)


--



4,511Others


299



334Total

$
1,178


$
6,065
 
 (*)Reflects withholding tax held in deposit by the Company due to the completion of the Employee Exchange Offer on December 22, 2009, which was paid to the tax authorities subsequent to balance sheet date. (See also Note 11.)
 
 NOTE 8:-   INVENTORIES
  December 31,2010


2009Raw materials

$
147


$
176Work in progress


317



179Finished products


4,058



1,178Total

$
4,522


$
1,533
 
 NOTE 9:-   PROPERTY AND EQUIPMENT, NET
 
 December 31,2010


2009Cost:Office furniture and equipment

$
72


$
22Computers, software and electronic equipment


4,510



4,339Leasehold improvements


67



64Total cost

$
4,649


$
4,425Accumulated depreciation:Office furniture and equipment


7



6Computers, software and electronic equipment


4,160



3,966Leasehold improvements


63



59Total accumulated depreciation


4,230



4,031Depreciated cost

$
419


$
394
 
 Depreciation expenses for the years ended December 31, 2010, 2009 and 2008 amounted to $199, $199 and $231, respectively.
  F - 29
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 10:- INTANGIBLE ASSETS, NET
 
 December 31,2010


2009Cost:Existing technology

$
8,663


$
8,663Customer relationships


2,714



2,714Total cost

$
11,377


$
11,377Accumulated amortization:Existing technology


8,066



6,150Customer relationships


2,130



1,358Total accumulated amortization


10,196



7,508Amortized cost

$
1,181


$
3,869
 
 Amortization expenses for the years ended December 31, 2010, 2009 and 2008 amounted to $2,688, $2,825 and $2,558, respectively.
 
 Following is the expected amortization expenses in respect of the Company’s intangible assets:
 
 Year ended December 31,2011

$
9772012


204Total

$
1,181
 
 NOTE 11:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 December 31,2010


2009Employees and payroll accruals

$
3,638


$
3,703Withholding tax (*)


--



4,511Accrued expenses


2,780



1,940Prepayment of OCS grants


58



--Deferred revenues


93



64$
6,569


$
10,218
 
 (*) See also Note 7.
 
 F - 30
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES
 
 a.
Lease commitments:
 
 The Company and EZchip Technologies lease facilities in Yokneam and Kiryat Gat under operating lease agreements, which will expire in January 2014 and October 2015, respectively, with monthly payments in the amount of $39 and $5, respectively. The Company has an option to extend the Kiryat Gat lease agreement for an additional five years.
 
 The Company has the right to terminate the Yokneam operating lease agreement upon an advance notice of 90 days.  The operating lease agreement for the Kiryat Gat facility does not permit the Company to terminate the lease prior to October 2012, and thereafter the lease can be terminated with advance notice of at least 180 days and payment of a penalty.
 
 EZchip Inc. leases two offices in the United States under lease agreements that it renews every year for a monthly payment of $7.
 
 The Company leases motor vehicles under standard commercial operating leases.
 
 Aggregate minimum lease commitments under non-cancelable operating leases as of December 31, 2010 are as follows:
 
 Year ended December 31,2011

$
3692012


135Total

$
504
 
 Total lease expenses for the Company and for its subsidiaries for the years ended December 31, 2010, 2009 and 2008, amounted to $1,849, $1,605 and $1,719, respectively.
 
 b.
Royalties commitments:
 
 EZchip Technologies participates in programs sponsored by the OCS for the support of research and development activities.
 
 In each of 2010, 2009 and 2008, 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, 2010.
 
 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.
 
 With respect to royalties paid for revenues that the Company derives from its partnership with Marvell (see also Notes 2r and 2v), royalties to the OCS are calculated based on Marvell's sale price to Cisco.
 
 F - 31
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
 
 b.
Royalties commitments (cont):
 
 As of December 31, 2010, the Company has a contingent obligation of $10,328 which comprised of the amounts of royalty bearing grants received from the OCS less royalties already paid back or accrued to date on account of such obligation For the years ended December 31, 2010, 2009 and 2008, the royalties expenses were $1,683, $383 and $99, respectively.
 
 As of December 31, 2010 and 2009, the Company accrued royalties pursuant to the OCS program in the amount of $999 and $189, respectively, to its cost of revenues line item in the statement of operations.
 
 NOTE 13:- SHAREHOLDERS' EQUITY
 
 a.
Company's shares:
 
 1.
As of December 31, 2010, 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, among other things, the right to receive notice to participate and vote in general meetings of the Company, the right to a share in the excess of assets upon liquidation of the Company, and the right to receive dividends, if declared.
 
 2.
On January 14, 2010, the Company issued and sold 106,893 Ordinary Shares in the underwritten public offering following the exercise by the underwriter of its over-allotment option for a total consideration of $1,072.
 
 3.
During December 2009 and as part of the Employee Exchange Offer, the Company issued 956,392 Ordinary Shares in a public offering for total consideration of $7,146, net of issuance costs of $213. All of the proceeds were used to increase the Company's ownership interest in EZchip Technologies (see also Note 3).
 
 4.
During 2008, the Company issued 5,011,841 Ordinary Shares in connection with the acquisition of EZchip Technologies shares (see also Note 3).
 
 F - 32
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)
 
 b.
Company's stock option plans:
 
 In October 2003, EZchip Semiconductor adopted the 2003 Israel Plan.  The plan was amended in December 2006 and further amended in December 2007 and October 2010.  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. 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 is less than 4% of the number of Ordinary Shares issued and outstanding, it will automatically increase to equal 4% of the number of Ordinary Shares issued and outstanding on such date. Awards under the 2003 Israel Plan may be 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 restricted shares units (“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 and 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, 2010, 2,071,799 Ordinary Shares were available for future issuances under the 2003 Israel Plan, which amount is reduced by three shares for each RSU that the Company grants under the plan and by one share for each option that the Company grants under the plan. As of December 31, 2010 and 2009, options to purchase 1,773,992 and 2,115,280 Ordinary Shares were outstanding under the 2003 Israel Plan, respectively. In addition, as of December 31, 2010 and 2009, 433,101 and 95,961 RSUs were outstanding under the 2003 Israel Plan, respectively.
 
 In December 2007, the Company adopted the 2007 U.S. Equity Incentive Plan (the "2007 U.S. 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, 2010, 479,600 Ordinary Shares were available for future issuances under the 2007 U.S. Plan, which amount is reduced by three shares for each RSU that the Company grants under the plan and by one share for each option that the Company grants under the plan. As of December 31, 2010 and 2009, options to purchase 253,991 and 376,537 Ordinary Shares were outstanding under the 2007 U.S. Plan, respectively. In addition, as of December 31, 2010 and 2009, 45,850 and 10,766 RSUs were outstanding under the 2007 U.S. Plan, respectively.
 
 F - 33
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)
 
 b.
Company's stock option plans (cont.):
 
 In November 2009, the Company adopted the 2009 Israel Equity Plan (the "2009 Israel Equity Plan").  The plan was adopted in connection with the Employee Exchange Offer, as described in Note 3, for the sole purpose of issuing options to purchase the Company's ordinary shares to the Company's former and current Israeli employees who elect to exchange their options to purchase ordinary shares of EZchip Technologies.  Up to 2,500,000 Ordinary Shares of the Company may be granted under the 2009 Israel Equity Plan, which amount is reduced by one Ordinary Share for each option granted under the plan.  The 2009 Israel Equity Plan is administered by the Board of Directors, or a committee of the Board that is delegated authority to act as the administrator.  Under the 2009 Israel Equity Plan, the Company may grant options to purchase its Ordinary Shares to former and current employees, directors, consultants, advisers and service providers of the Company and its subsidiaries in exchange for their options to purchase ordinary shares of EZchip Technologies.  The 2009 Israel Equity Plan provides for the awards granted to have a maximum exercise period of ten years from the date of grant.
 
 During 2010, the Company granted options to purchase 41,120 Ordinary Shares pursuant to the 2009 Israel Equity Plan in exchange for the remaining outstanding options to purchase ordinary shares of EZchip Technologies. As of December 31, 2010, options to purchase an aggregate of 374,126 Ordinary Shares were outstanding under the 2009 Israel Equity Plan, all of which were granted in December 2009 and during 2010 as part of the Employee Exchange Offer, as described in Note 3.  All options granted under the 2009 Israel Equity Plan as part of the Employee Exchange Offer were granted as vested options.
 
 Transactions related to the grant of options to current and former employees and directors under the above plans during the years ended December 31, 2010, 2009 and 2008, were as follows:
 
 Year ended December 31,2010


2009


2008Weighted





Weighted





Weightedaverage





average





AverageNumber

of options


exercise

price


Number

of options


exercise

price


Number

of options


exercise

priceOutstanding at beginning of year


3,997,757


$
9.49



1,716,250


$
13.83



86,000


$
11.92Granted


--



--



663,120


$
15.28



1,638,500


$
13.93Issued pursuant to Employee Exchange Offer - See also Note 3


41,120


$
2.81



1,642,340


$
2.66



--



--Exercised


(1,604,915
)

$
4.98



(6,313
)

$
13.90



(1,250
)

$
2.88Forfeited


(31,853
)

$
14.46



(17,640
)

$
13.94



(7,000
)

$
13.90Outstanding at end of year


2,402,109


$
12.32



3,997,757


$
9.49



1,716,250


$
13.83Exercisable options at end of year


1,231,311


$
10.06



2,370,437


$
6.05



80,000


$
11.55Vested and expected to vest


2,243,564


$
12.15



3,893,874


$
9.07



1,623,549


$
13.86
 F - 34
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)
 
 b.
Company's stock option plans (cont.):
 
 The intrinsic value of exercisable options (the difference between the Company's closing share price on the last trading day in fiscal 2010 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, 2010. This amount changes based on the fair market value of the Company's Ordinary Shares. Aggregate intrinsic value of outstanding options, exercisable options and vested and expected to vest options as of December 31, 2010 was $37,910, $22,218 and $35,785, respectively.
 
 Aggregate intrinsic value, at the date of exercise, of options that were exercised during the years ended December 31, 2010 and 2009 was $26,097 and $18, respectively.
 
 The options outstanding as of December 31, 2010, grouped by exercise prices, were as follows:
 
 Options

outstanding

as of


Weighted

average remaining


Options

exercisable

as of


Weighted

average remaining


Aggregate

intrinsic

value as ofDecember 31,


contractual


December 31,


contractual


December 31,Exercise price


2010


life years


2010


life years


2010$1.52 - $3.80



435,683



2.63



435,683



2.63


$
10,949$10.33 - $12.23



181,640



4.49



45,406



1.09



721$13.45 - $16.62



1,784,786



4.48



750,222



4.22



10,5482,402,109



4.14



1,231,311



3.54


$
22,218
 
 As of December 31, 2010, weighted average remaining contractual life of options vested and expected to vest is 4.49 years.
 
 The following table illustrates the weighted average assumptions that had been used in calculating the fair value for options granted by the Company during 2009 and 2008. These options are amortized over their vesting period:
 
 Year ended December 31,2009


2008Dividend yield


0
%


0
%Expected volatility


61
%


60
%Risk-free interest


1.86
%


2.75
%Expected life of up to

4.9 years


4.5 years
 
 Weighted average fair values on the date of grant of options granted for the years ended December 31, 2009 and 2008 were $8.06 and $7.06, respectively.
 
 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%.
 
 F - 35
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)
 
 b.
Company's stock option plans (cont.):
 
 The following table summarizes information relating to RSU awards:
 
 Year ended December 31,2010


2009


2008Number

of RSUs


Weighted average fair value at grant date


Number

of RSUs


Weighted average fair value at grant date


Number

of RSUs


Weighted average fair value at grant dateOutstanding at beginning of year


106,727


$
15.61



15,750


$
18.60



29,250


$
17.71Granted


390,909



17.18



101,978



15.47



--



--Vested and issued


(7,078
)


22.01



(8,281
)


18.60



(12,000
)


16.67Forfeited


(11,607
)


15.67



(2,720
)


18.41



(1,500
)


16.67Outstanding at end of year


478,951


$
16.78



106,727


$
15.61



15,750


$
18.60
 
 Aggregate intrinsic value, at the date of vesting of RSUs and issuance of shares during the years ended December 31, 2010 and 2009 was $165 and $110 respectively.
 
 Aggregate intrinsic value of RSUs outstanding as of December 31, 2010 was $13,459.
 
 c.
Company's stock-based compensation:
 
 The Company's stock-based compensation expense recognized for years ended December 31, 2010, 2009 and 2008, was comprised as follows:
 
 Year ended December 31,2010


2009


2008Costs of revenues

$
303


$
214


$
116Research and development expenses


2,941



2,908



1,600Selling and marketing expenses


1,177



1,048



604General and administrative expenses


1,409



1,175



813Total stock-based compensation expenses

$
5,830


$
5,345


$
3,133
 
 As of December 31, 2010, there was $12,041 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 1.7 years.
 
 In connection with an investment agreement that 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 the issuance to the investor of 6,668 Ordinary Shares.
 
 F - 36
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
  NOTE 14:- EZCHIP TECHNOLOGIES SHARES
 
 EZchip Technologies stock option plans:
 
 EZchip Technologies has granted options to purchase its ordinary shares to 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"). Under the terms of these grants, options generally became exercisable over a four-year period, commencing with the date of grant. The options were generally due to expire seven to ten years from the date of the grant and were non-transferable, except under the laws of succession.
 
 In December 2007, the Company discontinued its practice of granting employees options to purchase shares of EZchip Technologies pursuant to the EZchip Technologies option plans.  Instead, since such date all incentive awards to EZchip Technologies employees consisted of options or RSUs to purchase Ordinary Shares of the Company.
 
 The following table is a summary of activity for EZchip Technologies’ stock option plans:
 
 Year ended December 31,2010


2009


2008Weighted





Weighted





Weightedaverage





average





averageNumber

of options


exercise

price


Number

of options


exercise

price


Number

of options


exercise

priceOutstanding at beginning of year


156,250


$
0.74



9,223,541


$
0.67



9,628,965


$
0.68Granted


--



--



--



--



--



--Exercised


--



--



(2,791,838
)

$
0.59



(38,594
)

$
0.95Reduction due to exchange offer(*)


(156,250
)

$
0.74



(6,241,078
)

$
0.70



--



--Forfeited


--



--



(34,375
)

$
0.80



(366,830
)

$
0.99Outstanding at end of year


--


$
--



156,250


$
0.74



9,223,541


$
0.67Exercisable options at end of year


--


$
--



--


$
--



7,027,553


$
0.64Vested and expected to vest


--


$
--



156,250


$
0.74



9,077,627


$
0.65
 
 (*) See also Note 3.
 
 F - 37
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 15:- TAXES ON INCOME
 
 a.
Uncertain tax positions
 
 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 2006 through 2010. EZchip Inc. (the U.S. subsidiary) may be subject to examination by the U.S. Internal Revenue Service (“IRS”) from commencement year 2001 through 2010.
 
 The Company believes that it has adequately provided for any reasonably foreseeable outcome related to tax audits and settlement. However, 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 31,2010


2009Beginning balance

$
218


$
217Reduction related to "a lapse of applicable statute of limitation"


--



(162
)Additions for current year tax position


78



163Ending balance

$
296


$
218
 
 The Company recognizes interest and penalties related to income taxes in the taxes on income line in its consolidated statements. The Company has approximately $23 and $5 accrued for the payments of interest and penalties as of December 31, 2010 and 2009, respectively.
 
 b.
Amendment to the Israeli Income Tax Ordinance
 
 On July 25, 2005, the Israeli Parliament approved the Law for the Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among other provisions, a gradual decrease in the corporate tax rate in Israel to the following tax rates: in 2008 – 27%, in 2009 – 26% and in 2010 and thereafter – 25%.
 
 On July 2009, the Israeli Parliament passed the Law for Economic Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and 2010), 2009, which prescribes, among others, an additional gradual reduction in the rates of the Israeli corporate tax and real capital gains tax starting 2011 to the following tax rates: 2011 – 24%, 2012 – 23%, 2013 – 22%, 2014 – 21%, 2015 – 20%, 2016 and thereafter – 18%.
 
 F - 38
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 15:- TAXES ON INCOME (CONT.)
 
 c.
Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:
 
 Through 2007, results for tax purposes for the Company are measured and reflected in accordance with the change in the Israeli Consumer Price Index (“CPI”). As explained above in Note 2c, the consolidated financial statements are presented in U.S. dollars. The differences between the change in the Israeli CPI and in the NIS/U.S. dollar exchange rate cause a difference between taxable income and the income before taxes reflected in the consolidated financial statements.
 
 In accordance with FASB ASC 740-10-25, the Company has not provided deferred income taxes on the above differences resulting from changes in exchange rates and indexing for tax purposes of assets and liabilities.
 
 On February 26, 2008, the Israeli Parliament 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 the 2007 tax year and as of the 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 as of the 2008 tax year, income for tax purposes is no longer 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.
 
 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. To date EZchip Technologies has one approved and two privileged programs subject to the alternative track (as discussed below), that provide its undistributed income exempt from tax for a ten year period, starting the first year in which the Company generates taxable income from its enterprises.
 
 A company that obtained an Approved Enterprise approval 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 Approved enterprise in the Alternative Track.
 
 F - 39
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 15:- 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 Law came into effect (the “Amendment”) and has significantly changed the provisions of the Law. Generally, investment programs that have already obtained approval for an Approved Enterprise by the Israeli Investment Center will continue to be subject to the Law’s provisions. On the Alternative Track the Amendment enacted major changes in the manner in which tax benefits are awarded under the Law so that companies are no longer required to obtain Investment Center approval in order to qualify for tax benefits. Such an enterprise is a “Privileged Enterprise”, rather than the previous terminology of Approved Enterprise. 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 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 two Privileged Enterprise programs are.
 
 The benefits available to an Approved and Privileged Enterprises are conditioned upon terms stipulated in the 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.
 
 Tax-exempt income generated under the provisions of the law will subject the Company to taxes upon distribution or liquidation and the Company may be required to record deferred tax liability with respect to such tax-exempt income.
 
 Recently, new legislation amending the Law was adopted. Under this new legislation, a uniform corporate tax rate will apply to all qualifying income of certain Industrial Companies, as opposed to the current law’s incentives, which are limited to income from Approved Enterprise and Privileged Enterprises during their benefits period. Under the new law, the uniform tax rate will be 10% in areas in Israel designated as Development Zone A and 15% elsewhere in Israel during 2011-2012, 7% and 12.5%, respectively, in 2013-2014, and 6% and 12%, respectively thereafter. The profits of these Industrial Companies will be freely distributable as dividends, subject to a 15% withholding tax (or lower, under an applicable tax treaty).
 
 Under the transition provisions of the new legislation, the Company may elect to irrevocably implement the new law while waiving benefits provided under the current law or to remain subject to the current law. Changing from the current law to the new law is permitted at any time. The Company does not expect the new law to have a material effect on the tax payable on its Israeli operations in the foreseeable future.
 
 F - 40
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 15:- TAXES ON INCOME (CONT.)
 
 e.
The tax benefit (taxes on income), for the years ended December 31, 2010, 2009 and 2008 consisted of the following:
  Year ended December 31,2010


2009


2008Current

$
--


$
--


$
--Deferred


(8,236
)


11,675



--$
(8,236
)

$
11,675


$
--Domestic (Israel)

$
(7,817
)

$
11,256



--Foreign


(419
)


419



--$
(8,236
)

$
11,675


$
--
 
 f.
Net operating and capital losses carryforward:
 
 As of December 31, 2010, the operating tax loss carryforwards of the Company totaled to $42,445. Of that amount $31,207 is related to EZchip semiconductor, which the Company does not believe will be utilized in the foreseeable future. The remaining $11,238 is related to EZchip Technologies for which the Company expects to utilize in the short-term and for which a valuation allowance was not provided. The loss may be carried forward indefinitely and may be offset against future taxable income.
 
 The operating tax loss carryforwards through December 31, 2010 of EZchip Inc. amounted to $3,951. The loss may be offset against any future U.S. taxable income for periods of 20 years expiring gradually from 2021 through 2030.
 
 Utilization of the U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of Section 382 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, 2010, the Company does not expect that the change in ownership provisions will have an effect on its net operating losses.
 
 As of December 31, 2010, the Company's and EZchip Technologies capital tax loss carryforwards amounted to $30,590. The capital loss may be carryforward indefinitely and may be offset against future capital income.
 
 g.
Income (loss) before tax is comprised as follows:
 
 Year ended December 31,2010


2009


2008Domestic (Israel)

$
21,454


$
5,485


$
(4,966
)Foreign


425



314



329$
21,879


$
5,799


$
(4,637
)
 
 F - 41
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 15:- TAXES ON INCOME (CONT.)
 
 h.
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 31,2010


2009Deferred tax assets:Current reserves and allowances

$
903


$
1,689Noncurrent reserves and allowances


94



606Current operating loss carryforwards


2,697



4,425Noncurrent operating loss carryforwards


6,961



11,353Capital loss carryforwards


5,506



7,256Total deferred tax assets


16,161



25,329Less - valuation allowance


(12,648
)


(13,654
)Total deferred tax assets,

$
3,513


$
11,675Total deferred tax liabilities


(70
)


(66
)Net deferred tax assets

$
3,443


$
11,609
 
 In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods and in the jurisdictions in which temporary differences are deductible and net operating losses are utilized. Based on consideration of these factors, the Company recorded a valuation allowance of $12,648 and $13,654 at December 31, 2010 and 2009, respectively.
 
 F - 42
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 15:- TAXES ON INCOME (CONT.)
 
 i.
Reconciliation of the theoretical tax expense (benefit) to the actual tax benefit:
 
 Reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company, and the actual tax expense as reported in the statement of operations is as follows:
 
 Year ended December 31,2010


2009


2008Income (loss) before taxes as reported in the consolidated statements of operations

$
21,879


$
5,799


$
(4,637
)Statutory tax rate


25
%


26
%


27
%Theoretical tax expenses (benefits) on the above amount at the Israeli statutory tax rate

$
5,470


$
1,508


$
(1,252
)Non-deductible expenses and temporary differences for which a deferred taxes was not provided


2,205



766



2,109Non-deductible expenses related to employee stock options, net


751



1,270



846Deferred taxes on losses (utilization of losses) and temporary differences for which a valuation allowance was provided


(1,006
)


(16,038
)


406Difference in basis of measurement for tax purpose and others


756



803



(2,126
)Others


60



16



17Actual taxes on income (taxes benefit)

$
8,236


$
(11,675
)

$
--
 
 F - 43
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 16:- 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 table presents total revenues for the years ended December 31, 2010, 2009 and 2008 and long-lived assets as of December 31, 2010, 2009 and 2008:
 
 2010


2009


2008Revenues


Long-lived

Assets (*)


Revenues


Long-lived

Assets (*)


Revenues


Long-lived

Assets (*)Israel

$
6,910


$
617


$
4,307


$
392


$
4,785


$
321China and Hong Kong


32,896



--



23,463



--



10,844



--Far East

(excluding China and Hong Kong)


1,567



--



300



--



2,925



--Canada


638



--



340



--



9,570



--USA


6,584



2



7,286



2



4,218



2Europe


13,310



--



4,179



--



1,118



--Others


93



--



171



--



106



--$
61,998


$
619


$
40,046


$
394


$
33,566


$
323
 
 (*) Excluded goodwill and intangible assets.
 
 c.
Revenues from network processors amounted to $60,883, $39,109 and $32,784 for the years ended December 31, 2010, 2009 and 2008, respectively (including NPU based systems). These revenues also included royalties revenues derived from the partnership with Marvell which amounted to $12,468, $3,123 and $706 for the years ended December 31, 2010, 2009 and 2008, respectively. In addition revenues from software tools and other services amounted to $1,115, $937 and $782 for the years ended December 31, 2010, 2009 and 2008, respectively.
 
 d.
Sales to the Company's significant customers, including sales to their manufacturing subcontractors, as a percentage of total revenue were as follows:
 
 Year ended December 31,2010


2009


2008Customer A


40
%


54
%


55
%Customer B


20
%


--



--Customer C


10
%


--



--
 F - 44
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 17:- 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 years ended December 31, 2010, 2009 and 2008, the Company’s principal subcontractors accounted for approximately 77%, 83% and 73%, respectively, of the Company’s cost of revenues.
 
 NOTE 18:- FINANCIAL INCOME, NET
 
 Year ended December 31,2010


2009


2008Income:Interest income

$
1,161


$
1,027


$
1,448Foreign currency translation adjustments


13



--



46Realized gain related to sale of marketable securities


12



--



--Total income


1,186



1,027



1,494Expenses:Interest and bank charges


(56
)


(55
)


(59
)Foreign currency translation adjustments


--



(64
)


--Realized loss related to sale of marketable securities


--



(6
)


(27
)Total expenses


(56
)


(125
)


(86
)Financial income, net

$
1,130


$
902


$
1,408
 
 F - 45
 
 EZCHIP SEMICONDUCTOR LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 NOTE 19:- EARNINGS PER SHARE
 
 The following table sets forth the computation of basic and diluted net earnings per share:
 
 Year Ended December 31,2010


2009


2008Numerator:Net income (loss)

$
13,643


$
17,382


$
(4,600
)Denominator:Weighted-average number of shares outstanding used in computing basic net earnings per share


25,281,651



23,376,217



23,048,868Dilutive effect: stock options and RSUs


828,481



140,043



--Total weighted-average number of shares used in computing diluted net earnings per share


26,110,132



23,516,260



23,048,868Basic net income (loss) per share

$
0.54


$
0.74


$
(0.20
)Diluted net income (loss) per share

$
0.52


$
0.66


$
(0.20
)
 
 Anti-dilutive securities
 
 The following outstanding options and RSUs were excluded from the computation of diluted net earnings per Ordinary Share for the periods presented because including them would have had an anti-dilutive effect.
 
 Year Ended December 31,2010


2009


2008Options to purchase Ordinary Shares, RSUs and warrants


538,623



2,356,524



2,210,800
 
 F - 46
 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 FruchterEli FruchterPrincipal Executive Officer
 Dated:   March 31, 2011